Insurers to make up 20% of property lending by 2015

Insurance companies are expected to account for up to 20% of the European real estate lending market over the next few years. However, this figure will not be enough to compensate for the wide-scale retreat by banks from the sector, according to panellists at PropertyEU's European Real Estate Policy and Investment Forum at REALTY Brussels last week.

Some EUR 800 bn of real estate debt is due for refinancing in Europe over the next three years, while the lending contribution from insurance companies will only be a fraction of the total, Ad Buisman, EMEIA real estate leader at Ernst, said.

Many banks are abandoning or scaling back on real estate financing due to the combination of bad loans built up since the mid-2000s and the European Union's incoming Basel III regulations that will impose higher risk provisions. The incoming Solvency II rules will impose similar capital reserve requirements on insurance companies: 25% on direct real estate; 39% on listed real estate and 49% on real estate fund investments.

Solvency II had initially been dubbed 'the kiss of death' for the real estate industry. But attitudes have changed as insurers have begun to look at property lending. 'More and more insurance companies are moving into the real estate lending business and the forecast is that they will make up 20% of that business over the next three years,' Buisman said.

Insurers can lend to real estate in a multitude of formats: by buying existing loans, issuing new loans; providing senior or junior debt and participating in restructurings or in third-party debt funds or even setting up their own funds.

But Buisman cautioned against widespread optimism among real estate professionals that insurers will make up the shortfall from banks. 'Talking to the insurance companies it is clear this is over-optimistic. The insurers say there is no way ever that they could replace the banks and they don't intend to try.' Instead they are taking high-margin business or the opportunistic business, 'but only bits and pieces of that'.

This underscores the reality, Buisman said, that Solvency II is only one of the reasons insurance companies are beginning to lend to real estate. 'Mostly it is the higher margins that attract them and also, they are looking for a long-term product to match the long-term provisions on their balance sheet,' Buisman said.