European property companies are pushing regulators to relax the rules that curtail investment in real estate by insurers, a reform that would trigger massive new capital flows.
The push to attract more business from some of the region’s biggest institutional investors comes at a time when valuations across many of Europe’s property markets are already trading at record levels.
An index that tracks the region’s biggest listed property companies has a combined market capitalisation of around €247bn, according to the European Public Real Estate Association, an industry body.
Epra said the value of the index could double to close to €500bn if regulations that govern insurers, known as Solvency II, were liberalised.
Under Solvency II, insurers are required to hold capital to guard against potential losses on their investments in property, equities and bonds.
Epra is lobbying the EU’s insurance regulator, the European Insurance and Occupational Pensions Authority, to lower the capital weighting on listed property investments from 39 per cent, the level used for equities, to 25 per cent.
This would bring it into line with the threshold imposed on direct property investments by insurers.
“One of the biggest obstacles to European insurers investing in listed real estate companies is the heavy capital weightings imposed by Solvency II,” said Dominique Moerenhout, chief executive of Epra.
He added that Epra was “petitioning the European Commission to cut this burden from around the industry’s neck”.
Epra has appealed to the insurance regulator, which is undertaking a review of how Solvency II is working, arguing that there is no difference in the risks between listed or unlisted property investments over the long term.
German insurers are particularly interested in making the requirement less onerous, as the prevalence of listed property companies in the country makes the sector a more important consideration in their portfolios.
“The insurance industry is having a tough time covering its liabilities due to the low-yield environment in bond markets and is looking for new investment opportunities. If the Solvency II charge is cut, it could have a very positive effect on insurers,” said Stefan Krausch, head of real estate portfolio management at MEAG, the asset management arm of Munich Re, the global reinsurance group.
Inrev, the European association that represents investors in non-listed real estate vehicles, is also pushing for a relaxation of the rules.
It wants the capital weighting for non-listed real estate assets to be cut from 25 per cent to as low as 12 per cent, arguing that Solvency II rules were based on data that overestimated potential price falls.
Inrev has suggested that a 15 per cent capital weighting would be more appropriate, and this could be reduced by a further three percentage points if the UK were excluded, given the size and volatility of London’s property market.
“We’re not trying to play hardball at all,” said Jeff Rupp, director of public affairs at Inrev. “The current information is much more accurate than the original data.”
The insurance regulator said it provided independent advice to help shape informed policies and laws in the EU. “The dialogue with relevant stakeholders is one important element in the development of this advice. The decision on the final advice is taken by EIOPA’s board of supervisors,” it said.
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