Index provider MSCI and a number of real estate associations have renewed calls to soften Solvency II requirements for real estate investments.
MSCI has published an update to its 2011 study, which argued that the capital charge for European real estate investments should be reduced from 25% to 15%.
In the 2011 report, MSCI showed that the standard solvency capital requirement (SCR) for holding real estate assets overestimated the risk for European real estate, because it was calculated using a limited set of data.
This was partly because the SCR – the proportion of capital that insurers most put aside when holding risk assets – was based on data for UK real estate, which is shown to be more volatile than many other European markets.
“The new data reinforces the conclusion, reached in our 2011 study, that a 15% SCR is a more accurate reflection of the available evidence of extreme downside risk across a broad geographical spread of European real estate investment markets over the past 15 years,” said Ian Cullen, real estate advisory director at MSCI and co-founder of IPD, which was acquired by MSCI in 2012.
MSCI stated that the report “offers a more comprehensive and robust basis for concluding that an evidence-driven pan-European property shock factor need be no more than 15%”.
MSCI also found that an SCR of 12% would be more appropriate for European real estate porfolio that had no UK holdings.
The latest report adds six years of European investment market records, updates the capital risk analysis to December 2015, and includes data from five additional countries.
The report was commissioned by INREV in partnership with other industry associations, including AREF, BPF, BVI, IPF and ZIA, in anticipation of a forthcoming review of Solvency II requirements.
Matthias Thomas, CEO of INREV, said: “The current 25% SCR for European real estate clearly misrepresents the picture across Europe – especially given that the UK market shock in 2007-08 currently constitutes the only statistical basis for the level of that requirement.”
The European Insurance and Occupational Pension Authority (EIOPA) has said it is committed to reviewing the SCR before the end of 2018. Over the coming months, European policymakers are expected to seek feedback on Solvency II in general and the current SCR arrangements in particular.