Will German insurance companies be able to invest more in real estate products following the latest moves by the German regulator? Sven Behrends considers the outlook
German insurance companies are important real estate investors. Nevertheless, a lot of them are still mainly invested in German assets and the range of real estate exposure is usually between 4-10%. Therefore, real estate fund initiators/asset managers are eager to raise the interest level of insurers for further German and, in particular, global real estate investments. But, before stepping into the marketing process, it is important to learn the "German regulatory lesson".
German insurance companies are, inter alia, governed by the VAG (Versicherungsauf-sichtsgesetz) and the respective ordinance - AnlV (Anlageverordnung). In particular, the AnlV lists and defines the eligible categories of assets as well as the required mix and spread of the insurer's investments. As of July 2010, the AnlV has been amended. The abolition of the 10% investment limitation for equity investments, in particular, has been warmly welcomed by the fund initiators. The German regulatory body (BaFin) is set to introduce a new interpretational decree (a draft was circulated in January 2011). Based on the draft, it is debatable whether German insurers are now open to welcoming additional real estate products.
According to AnlV rules, indirect real estate products should qualify as (i) real estate companies or (ii) real estate funds, as eligible assets would be required.
German-regulated special funds Historically used by German insurers (and other institutional investors), these would qualify relatively smoothly. Although the draft decree stipulates a required redemption period of six months, this might not have a big impact in practice because a lot of these funds have a single investor or only a few. But, technically speaking, this requirement is in contrast to the two-year redemption period of the German investment law, which is the legal framework for German investment funds.
Non-German regulated funds These are subject to local investment supervision (eg, Luxembourg FCPs, French OPCIs), and may qualify as eligible asset for insurers, inter alia, if the management company is resident in the EEA (European Economic Area), the fund is comparable to its German counterpart and the investor has redemption rights. In particular, the comparability (eg, limitation on certain eligible assets, external leverage up to 60%, restrictions with respect to internal leverage, liquidity reserve, etc) very often creates problems for the initiator. Because of this, the initiator will often lose the flexibility and efficiency of using a non-German fund regime while targeting German insurers. Furthermore, BaFin requires a six-month redemption period to be AnlV-compliant.
As the implementation of redemption rights was very often not acceptable by the initiator, the newly introduced category for eligible closed-ended funds was seen as a light at the end of the tunnel. Such closed-ended funds would be eligible if units were distributed by a EEA-resident investment company and the fund were subject to local investment supervision. Furthermore, the fund needs to invest either in real estate companies or in other real estate funds, the portfolio of which comprises at least 80% real estate. Generally, BaFin would accept an external leverage of up to 60%. To ensure the required fungibility in the absence of a redemption right, the units need to be freely transferable.
Real estate companies These are an eligible asset, but it is BaFin's practice not to accept any external leverage (unless the insurer has acquired a debited property), which often makes this category infeasible for real estate funds.
According to the AnIV, the introduction of such closed-ended funds might be seen as an additional investment category. The introduction of the closed-ended fund category has actually been used by BaFin to introduce a new approach. It is important to note that certain real estate investments that could not qualify as real estate in the past have at least been accepted as equity investment. Even though in terms of marketing products this has been the "second choice" and the ticket was limited to 10% of the fund's capital, the investment could nevertheless qualify as a committed asset for the insurer. In the future, due to the introduction of the new closed-ended real estate category, BaFin will make a clear distinction between real estate and equity. Accordingly, any investment that may not qualify as a real estate investment would not be an eligible asset, ie, cannot be "rescued" in the equity bucket.
German insurers continue to be important investors. But the new approach of the German regulatory body will require initiators to thoroughly analyse their products to ensure they are compliant with the demands of German insurance companies. For the latter, certain products, eg, non-regulated leveraged real estate funds might not be marketable any more. Therefore, take a deep breath and get on it - to reach the dry land named "Solvency II"!
Sven Behrends, PwC, asset management - real estate