The decision last year by the European Commission to accept changes advocated for by the European Public Real Estate Association (EPRA) to reduce the Solvency II capital requirements for investments in listed real estate will open up new opportunities for investors.
The move will see a new capital requirements risk module for long-term investments in equities reduced from the 39 per cent standard equities module to a now favourable 22 per cent, after the European Commission acknowledged there was a difference between such investments and other, more risky equities. The initial figure of 39 per cent also compared unfavourably to non-listed direct real estate, which stands at 25 per cent.
“We appreciate the Commission’s recognition that equity capital charges were too high for insurers taking a long-term approach to investment,” said Dominique Moerenhout, CEO of EPRA. “The regulation suggested that listed real estate assets should be treated the same as short-term equity holdings, which is a common but grossly misplaced representation of the long-term investment opportunity the listed real estate sector presents.”
The initial changes came into effect in June 2019 following a three-month consultation period and a two-year lobbying process by EPRA. “The first time we heard about Solvency II was when our members who are insurance companies were coming to us and saying they’re quite heavily invested in our industry and would like to be even more, but there’s new legislation coming in which is going to be an obstacle,” recalls Mr Moerenhout. “The more we understood the principles, the more we realised that this law was one of the main obstacles to investment in our specific industry.
“EPRA pushed for the reduction, arguing that the impact of stock volatility on the performance of listed real estate was ironed out over time, and that over the long-term it offered a similar risk and reward profile to unlisted property.”
The challenge now is to ensure those working in the insurance sector are aware of the amendment, and the opportunities this opens up. Initial feedback has been extremely positive, says Moerenhout, but often more reassurance is needed before the anticipated additional investment in real estate can be released.
The capital rule changes require the average holding period of listed real estate investments to exceed five years, which is an improvement considering the European Commission’s initially proposed 12-year period. Nevertheless, insurers must demonstrate their intention to hold the investment for such a period. This requires a considerable amount of documentation and could prevent the new regulation from being an immediate relief for certain insurers.
But there’s no doubt that the success in overturning the original requirement has paved the way for investors looking to take advantage of the considerable opportunities that exist in listed real estate, as part of a balanced portfolio. “The changes to capital requirement rules mark significant progress for listed real estate and are a strong step towards an investment regime where the asset class is treated fairly by regulators, as a long-term investment,” concludes Moerenhout.
For more information please visit www.epra.com
