Changing EU capital requirement rules for insurers so that listed real estate is treated like direct property investment could significantly boost investment flows from Europe's €10 tln insurance investment industry, the CEO of the European Public Real Estate Association said at EPRA’s annual conference in London on Wednesday.
'One of the biggest obstacles to European insurers investing in listed real estate companies is the heavy capital weightings imposed by Solvency II,' commented EPRA CEO Dominique Moerenhout.
'EPRA is strongly petitioning the European Commission to cut this burden from around the industry’s neck under the Capital Markets Union (CMU) Action Plan and the Solvency II review. Solvency II deters insurance investors from a key source of quality assets and management, liquidity and transparency for their real estate portfolios. If insurers are able to appropriately weight listed real estate in their investment asset allocations, we believe the market capitalisation of the sector in Europe could possibly double.'
Insurer potential
Europe’s €10 tln insurance investment industry is the largest single pool of institutional capital in the EU, but currently has very limited exposure to listed real estate, in contrast to the US where pension funds are the sector's dominant source of investment.
'My twenty-something years of experience in the capital markets screams at me that if the risk charge goes down on REITs, then it could unlock hundreds of billions of euros in capital from the insurance industry,' said Mark Abramson, director of the European REIT investment business at Heitman and a member of EPRA’s Regulatory Committee.
'Even a fraction of that would be extremely positive for listed real estate in Europe,' he noted.
Solvency II
The EU’s Solvency II rules became fully applicable at the start of 2016, to ensure that insurance companies can meet their obligations to policy holders in the event of major losses. The rules fix the amount of capital they must hold against their investments for regulatory purposes, varying according to the risk of potential losses for each asset class.
The capital risk weighting required for listed real estate is 39%, along with equities. That contrasts with only 25% for direct property investments, due to the lower perceived risk of physical bricks and mortar.
According to EPRA, academic research suggests that the performance of listed real estate converges with direct property over the longer term, shedding the influence of the general equities market after just 18 months.
