Real estate investments have always been one of the main investment categories of insurance companies, especially for life insurers. Despite the long-term nature of real estate assets, calculating their duration remains challenging. As a consequence, the policy-makers who are devising the new regulatory regime for European insurers, Solvency II, have decided to adopt very punitive capital requirements for insurance companies holding these investments. In this Market Insight, we contend that the uniform approach to all real estate assets across all jurisdictions that is adopted by Solvency II’s standard model is not justified. We derive a statistically significant duration for residential real estate in multiple European countries. Based on this, we argue that Solvency II should adopt a much more tailored and risk-appropriate approach to capital weightings for real estate investments. Such a change is important because it could re-enable insurance companies to invest in real estate, a crucial ingredient to economic recovery in Europe.

Market Insight 22-05-2013 Solvency II and real estate; our challenge to the current proposals

Historically, sale and leaseback transactions have proven to be an effective and competitive way to finance acquisitions and to refinance companies that own real estate. In its traditional form, a company would sell its properties on an outright basis before leasing it back. In the early 2000s, companies began to move away from this traditional method in favour of the so-called OpCo-PropCo structure in which real estate would be leveraged without selling it. The financial crisis has exposed challenges in OpCo-PropCo transactions, the most important one being refinancing. In this article, we evaluate the once popular real estate monetisation technique and explore what options exist to meet the OpCo-PropCo refinancing challenge.

Market Insight 21-11-2011 OpCo-PropCo: A Redundant Technique or Here to Stay?