UK – Insurance companies may offer a further £30bn (€37bn) in commercial real estate (CRE) loans to the UK market, more than doubling their exposure over the next five years, according to new research.
Figures compiled by law firm DLA Piper further show that insurance companies are more likely to offer higher loan-to-value ratios than the typical market norm of 50-65%.
According to the research paper 'Searching for investment: Insurers as lenders', the insurance companies considering loans in the UK market will look for opportunities worth more than £50m, with a primary focus on retail and office space lending in the London and South East regions.
However, the paper was quick to scotch any suggestion that loans were growing as an alternative asset class due to the proposed high capital requirements Solvency II would impose on insurers' direct real estate holdings.
Ashley Goldblatt, head of commercial lending at Legal & General Investment Management, dismissed the idea his company was exploring loans due to the more favourable draft wording in Solvency II equating CRE loans to corporate bond holdings.
"History tells you, the one thing you can't rely on is regulatory arbitrage to make it worth your while doing something," he said.
"If the original draft stayed until the end – great news for us. Did we go into it believing that would happen? No, not at all.
"If you're a regulator, why give a significant capital advantage to a minority asset class? It doesn't make sense."
The paper further said that the growth in loans, expected to be £28.1bn over a five-year period, would be medium-dated, with terms between seven and 10 years and interest rates based around the Gilt yield rather than LIBOR.
The reliance on interest rates based a round yields likely stems from assets being diverted away from annuity funds, traditionally invested in bonds, but now looking to improve annuity rates by investing elsewhere.
It cited the recent £120m loan extended by LGIM to UK student housing provider UNITE as an example of such activity.
Simon Cookson, partner and UK head of real estate at DLA Piper, said that while only a few insurance companies were active in the CRE market in the UK, the expected returns would see interest increase over time.
"We expect insurance groups firmly to establish their position as lenders, and once they have put in place the requisite in-house infrastructure and expertise, insurers' provision of CRE lending should continue to expand into the market recovery," he said.
The full report, conducted in conjunction with the Centre for Economic and Business Research, interviewed representatives from 20 insurance companies.