EUROPE - The chairman of INREV believes European regulators will accept a lower capital requirements threshold for real estate.

Michael Morgenroth, who took over the position from Johan van der Ende last year, told delegates at IPD's annual European conference he was "confident" the proposed 25% capital charge for all European insurers holding direct property would be reduced.

Research commissioned by INREV and carried out by IPD has already shown that the solvency capital requirement (SCR) as proposed by the European Insurance and Occupational Pensions Authority (EIOPA) should be closer to 15%.

Speaking at the IPD European Property Investment Conference in Amsterdam, Ian Cullen, co-founder of IPD, said European real estate should not be treated as a single asset class when it comes to measuring risk, citing evidence of how individual European markets responded differently to the recent financial crisis.

But if EIOPA is determined to apply a blanket capital charge to European property, then the threshold should be closer to 15% than 25%, when adjusting for trading-linked volatility, Cullen added.

Morgenroth, who is also responsible for the real estate activities of German insurer Gothaer, said it made sense to push for a lowering of a single SCR for European real estate rather than lobbying for a series of different capital charges for individual property markets.

He said regulators would not have any appetite to add more layers to an already complex model.

However, some believe the way to address Solvency II most effectively is to focus on creating individual risk models that insurers can use instead of EIOPA's standard model.

Europe's largest insurers are planning to use their own internal risk models, which could result in lower capital charges for holding real estate - if they gain permission from the regulatory authorities.

So far this approach has only been seen as a possibility for large insurers, but Martin Lemke, chief executive at LB Immo Invest, told IP Real Estate that it might also be possible to create individual risk models for smaller insurers.

Lemke said the real estate fund management industry had the capabilities to create specific risk models for investors and that Solvency II could end up being an "innovation push for the whole industry".

He added: "If we get permission for that, I think Solvency II is not as critical as everyone sees it."

However, there is still uncertainty over whether regulators will accept internal models used by insurers.

Marieke van Kamp, real estate portfolio manager at ING Insurance Benelux, told delegates at the IPD conference that the insurer was using an internal risk model but would still have to show the results of EIOPA's standard model and explain any significant divergence between the two.

ING Insurance Benelux would probably reduce its real estate exposure in favour of bonds should the proposed 25% capital charge be introduced, she said.

Kamp added that, if the SCR for real estate was reduced to 15%, it would be in line with existing Dutch regulatory capital requirements and mean it was "business as usual" for the insurer in relation to its real estate investments.