INREV research calls for capital charge of up to 15%

The European association for Investors in Non-Listed Real Estate Vehicles (INREV) is calling for a capital charge of no more than 15% on insurance companies' real estate investments under the new Solvency II regime. The call follows a study commissioned by INREV which shows that current proposals for a capital charge of 25% are too high and are based on an incomplete view of risk which gives a disproportionate weighting to the UK commercial real estate market.

INREV has already held preliminary discussions with European policy makers regarding the research and anticipates further discussions based on the final version of the research report. A meeting is due to be held with EU officials on 2 May.

The research was carried out by Investment Property Databank (IPD) in conjunction with the CASS Business School and the University of Aberdeen. It concludes that the current Solvency II proposals do not mirror the full realities of the real estate market across Europe.

Michael Morgenroth, chairman of INREV and Management Board Member at Gothaer Asset Management commented: 'There seems to be consensus that 25% is too high and that a review of the capital charge would be useful. We welcome the opportunity to contribute to this review in whatever way we can; and we believe that the IPD research provides clear, independent evidence that the capital charge should be no more than 15%.'

He said that preliminary talks with EU officials had indicated that they were 'open-minded' and receptive to input from the sector. A final decision on the proposed changes is expected to be taken in the second half of this year. The new Solvency II regime is due to come into effect on 1 January 2013.

The study was commissioned because of a concern that if the current proposal is implemented, it could trigger a reduction in insurance companies’ asset allocations to real estate. However, real estate is an important element of an insurance company’s balanced and diversified investment portfolio because it has the potential to deliver competitive risk-adjusted returns together with inflation hedging characteristics for policyholders.

'What this research highlights is the need for a reassessment of the property shock factor that dictates the capital charge. In its current form, the charge could end up influencing the market as opposed to reflecting its risks, which is contrary to the ambitions of Solvency II,' said Matthias Thomas, CEO, INREV.

The Solvency II proposals have already had an impact on insurer's investment behaviour, according to INREV's latest Capital Raising Survey. While the total amount of capital raised last year increased by 80% to EUR 10.5 bn, life insurers accounted for a decline of nine percentage points. There are also indications that they have frozen their acquisition activities, Morgenroth added.

While INREV is currently calling for a uniform capital charge of no more than 15%, Morgenroth suggested that further down the road a range of new charges should be introduced that are sensitive to the complexities of property investment practice and performance across the individual countries and segments in Europe. He added, however, that INREV would not press for such refinements at this stage. 'The regulators don't want any more complexity.'

The research project was led by INREV and supported by six other key associations from the real estate and insurance industries in Europe including the Association of British Insurers (ABI), British Property Federation (BPF), Bundesverband Investment und Assetmanagement (BVI), European Public Real Estate Association (EPRA), German Property Federation (ZIA) and the Investment Property Forum (IPE).