The winner of the 2014 ranking of PropertyEU's Top 100 Investors in Europe is no surprise for regular followers of our special report.
The winner of the 2014 ranking of PropertyEU's Top 100 Investors in Europe is no surprise for regular followers of our special report.
For the third year running, Paris-based AXA Real Estate has significantly boosted its assets under management and gained the number one slot with €47.3 bn as of 31 December 2013.
What is possibly a surprise for some is that AXA Real Estate is by no means the only investment manager affiliated to an insurer that has seen its AUM grow in the past year. Indeed, four of the five top players in our ranking reported an increase over 2013 and overall the insurers account for 21% of our total pie, a rise of two percentage points year-on-year.
Does that mean that fears that insurers will reduce their allocations to real estate as an asset class due to the introduction of Solvency II are unfounded?
SOLVENCY II FAILS TO BITE
The answer, according to Jeff Rupp, INREV director of public affairs, is that investors appear to be continuing to make investment decisions based on merit and independent of Solvency II considerations. ‘We have seen little evidence so far to suggest that Solvency II has had any significant impact on insurers’ real estate allocations. This is partly because the largest insurers have already developed their own internal models. These would result in lower solvency capital requirements for real estate and insurers hope they will be approved by regulators before Solvency II comes into effect in 2016.'
However, even smaller insurers are likely to feel little impact from Solvency II, he said. ‘Solvency II is on insurers’ radar screen and they are looking at the implications per asset class – or bucket by bucket. But insurers are now required to look at the total solvency requirement of all asset classes together which has created a significant mitigating effect on the total impact. If you look at the volatility of each bucket, from A to Z, there is a risk that they will spill over, but not all at the same time. That’s why a – 65% – dampening effect has been introduced. In other words, you take the total solvency factor and multiply it by 0.65%. Effectively that leads to a 35% discount on the solvency capital requirement.’
In other words, the so-called dampening effect effectively reduces the standard solvency requirement for real estate from 25% to 16%, he added. ‘This is not far off from the 15% maximum solvency capital requirement INREV originally called for. Solvency II is not fantastic for real estate as it is still in the same relative position as other asset classes like equities while the solvency requirement for sovereign bonds is still 0%. But the dampening effect significantly mitigates the capital requirement.’
The top fund managers linked to financial institutions in our ranking also managed to boost their assets under management in the year to end-2013, but the number of new fund vehicles they have launched in the past 12 to 24 months has been relatively thin.
‘There has been a real push by the banking regulators to rein in financials and banking groups from doing anything other than classical banking since the outbreak of the financial crisis,’ Rupp noted. ‘The regulators believe they should go back to being old-fashioned banks and not become hybrid structures. But predicting which way they will go in the future is a bit like trying to read the tea leaves. It will be interesting to see how much pressure Basel III exerts in the medium to long term and whether banks want to come back with big fund vehicles. Certainly the regulators are trying to make things more difficult with higher capital requirements and proposed limits to provide seed capital for funds. But they do not seem be on a fast track yet.’
So far, one of the key regulatory changes affecting banking groups is the European Market Infrastructure Regulation (EMIR) which came into force on 16 August 2012. Under this regulation, members of a banking group which use derivatives such as interest rate or currency swaps as a financial counterparty will have to comply with derivatives clearing through a central counterparty, a licensing requirement for these central counterparties and requirements relating to collateral and portability of positions.
The regulation puts the real estate units of banking groups at a disadvantage compared to special purpose vehicles that fall under the AIFM, Rupp said. ‘SPVs that are a non-financial counterparty are subject to fewer and less burdensome regulatory requirements. In terms of central clearing, collateral posting and reporting, they are subject to the lightest regime.’
AIFMD HAS BIGGEST IMPACT
Overall, the regulatory change that has had the biggest impact on the real estate sector in Europe has been the AIFM directive which became fully effective in July 2014. Under the new legislation, fund managers that manage alternative investment funds in Europe are required to appoint a depositary and to report to the regulator about leverage levels and other financial aspects of a fund investment.
‘The AIFMD has radically altered the regulatory and operating environment of fund managers in Europe,’ Rupp said. ‘To comply with AIFM, fund managers now need to jump through hoops that they didn’t have to jump through before. But once they comply with AIFM, they are allowed to operate in other European countries under passport authority.’
Every European fund manager that falls within the scope of AIFM is required to get authorisation, Rupp explained. ‘The only ones that don’t have to comply are those with funds under €100 mln. Or if they don’t use any leverage, that can go up to €500 mln. But there are few fund managers who do that. Most UK and continental European fund managers are required to get authorised.’
While AIFM has thrown up additional costs in terms of the administrative burden of compliance, there are no significant costs associated with the application itself. Once a fund manager has received AIFM authorisation, the national regulator notifies other member states that the authorised manager wants to market or manager funds there under a European passport. So far, the countries that have been quickest to process the applications are Luxembourg, the UK, the Netherlands and France, Rupp said. ‘Germany has been a bit slow to give approval.’
The passport benefits may also become available to non-European fund managers in the future, Rupp said.
The European Securities and Market Authority (ESMA) is due to make a recommendation on the issue to the European Commission by mid-2015, he added. ‘If they make the recommendation, it will most likely be accepted. That would mean that by early 2016, non-EU fund managers can also apply for AIFM authorisation in one member state and obtain full passport rights for the rest of the EU.’
Most of the leading international brokerage firms also have a real estate investment management arm, but there are significant differences in size. CBRE Global Investors is the undisputed leader of the pack following the takeover of ING REIM in 2011, followed at quite some distance by LaSalle Investment Management. But while CBRE Global Investors has seen its assets under management shrink since the takeover, LaSalle has seen its figure climb by another 4% in the last 12 months.
For the first time this year, the PropertyEU ranking also includes separate categories for investment managers linked to pension funds and privately held players in Europe and the US. Institutional investors such as pension funds and insurance companies form the key capital sources f√or the leading real estate investment managers.
But while European insurers have spawned a significant group of specialist players in this field, the pension fund sector has lagged. A number of pension fund administrators are, however, evolving as a new breed of investment manager with a broader focus than their original source of capital.
Also, get the latest market intelligence at PropertyEU's Asset Management Investment Briefing hosted at Expo Real in Munch (Monday 6 October 17.00 - 17.50