EUROPE – INREV has praised the European Commission's Green Paper on long-term investment for acknowledging the negative impact of prudential regulation on real estate investors – even though the paper omitted to identify property as a long-term asset class.
Public affairs director Jeff Rupp described as "a positive sign" the Commission's willingness to recognise for the first time the cumulative impact of capital buffers required by Solvency II and IORP.
INREV claims the capital charge overstates real estate's volatility and that mark-to-market valuation is "inaccurate and unsuited to the asset class".
The Commission paper suggested that the "simultaneous introduction of liquidity requirements for different financial market players may discourage investments in less liquid assets and hence block several possible financing channels for long-term investment at the same time".
Yet the paper, which emphasised infrastructure's "stabilising role", mentions property only once, in passing – although an earlier draft had included REITs within a section on tax incentives for long-term financing.
Rupp attributed the omission in part to regulators' reluctance to create incentives they believe could lead to another bubble.
"They have not properly understood how the bubble was created – by short-term, pro-cyclical investment," he said. "In the run-up to the bubble bursting, you could see long-term investors disinvesting because they could see the bubble building."
Research to be published by INREV next month suggests countercyclical investors have failed to take advantage of yields in regional and secondary markets in anticipation of capital requirements.
Meanwhile, EPRA finance director Gareth Lewis said he had been surprised by the Commission's omission.
"A bigger, healthier [European] listed property sector would help achieve the objectives identified in this paper," he said.
"It's a bit of a blind spot. Commercial property is the type of asset they're looking at, and one of the most obvious ways to improve capital flows is through listed real estate because it has access to the widest range of capital."
Lewis said EPRA would be urging European regional and national governments to introduce best-in-class REIT legislation.
"It isn't a difficult conclusion to come to," he said.
