With interest rates at historically low levels, fixed income investors are on the hunt for investment opportunities with attractive risk/return profiles. Residential real estate debt appears to be one such opportunity in Europe. Risks are modest and returns are alluring. But what type of residential real estate debt instrument to invest in? Loan format, bond format or securitised format? In this Market Insight we compare and contrast the alternative investment opportunities that fixed income investors have when investing in residential real estate debt in Germany, the Netherlands or the United Kingdom.
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.
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.
Almost everyone in the market noticed the flurry of activity in new issue CMBS in both the US and this side of the Atlantic over the last couple of weeks. In this Market Insight we consider how these new issues differ from pre-crisis CMBS, the investor appetite, the stance of the rating agencies towards such deals, and what these new issues may signal to the market.