Long-term Investing Policy Framework
On 26 June 2013, the European Commission proposed a draft Regulation for investments into companies and projects for the long term. These private Europe Long-Term Investment Funds (ELTIFs) would only invest in businesses that need money to be committed to them for long periods of time. This proposal follows a Green Paper on long-term finance, published on 25 March 2013.
Real estate as a long-term investment plays a vital economic role, as it:
- Matches pension funds and insurers long-term liabilities
- Offers a counter-cyclical investment strategy
- Stimulates employment, growth and innovation
When investing long-term, investors are focused on long-term income streams more than capital appreciation and short-term price movements. It is not the duration of the holding period that is central, but the actual capacity of an investor to tolerate illiquidity, enabling it to hold assets through stress periods. Long-term investment in property, which differs significantly from short-term decisions leading to real estate bubbles, is a crucial part of a stable, long-term investment portfolio.
PDF Full Report – Real Estate as a Long-Term Investment (April 2013)
Summary: This paper considers the expected impact of regulatory change on long-term investing in real estate and its implications for the wider economy. It reviews the contribution of institutional investors to long-term investing and assesses the contribution of the real estate sector to the European economy. Furthermore, the impact of proposed regulations on institutional capital allocations to long-term investing is explored, as well as the implications of new regulations affecting real estate investing on the real economy.
PDF Snapshot – Real Estate as a Long-Term Investment (April 2013)
Summary: This snapshot provides a brief overview of the main points that are outlined in detail in the full report.
AIFMD – Alternative Investment Fund Manager Directive
The Directive on Alternative Investment Fund Managers (Directive 2011/61/EC) was adopted in 2011 and had to be implemented into national law by July 2013. In some Member States, implementation is still ongoing. The Directive has been introduced as a reaction to the economic and financial crisis and as an instrument for improved monitoring of macro-prudential system-based risks by alternative funds, such as hedge funds and private equity. It requires all AIFM within scope to be authorized and to be subject to harmonized regulatory standards. At the same time, it permits AIFM to market funds to investors throughout the EU subject to compliance with demanding regulatory standards.
The businesses of our members are capital intensive and are therefore dependent of well-functioning capital markets. Thus, we support prudential rules as financial market stability is fundamental for the economy and the European real estate industry. However, the rules must ensure legal certainty and be limited to the needed extent. Even with the implementation date passed, the actual definition of an “alternative investment fund” remains unclear, due to the broad scope and open wording of the Directive. Basically, it could also include property corporations or real estate investment trusts (REITs), even if this was not intended by the legislator and would not be in line with the regulatory goal of the Directive. Clarifying the key terms of the AIFM Directive at EU level is fundamental for a proper and uniform application of the Directive throughout Europe.
It is of vital importance for every business to be acquainted with the legal framework early enough in order to meet new regulatory standards and receive approvals required under the companies’ articles. Therefore, it is essential to identify the businesses concerned by the AIFMD within the wide range of different business models, strategies and structures across Europe. Such a clear identification of business models which qualify as AIF under the AIFMD is also of great importance, because other instruments at European level like the European Market Infrastructure Regulation ‘EMIR’ or the discussed draft directive on a common system of financial transaction tax, refer to the definition of AIF in the AIFM Directive.
Regarding the rules stipulated in the Directive, the real estate sector welcomes that many of its requests have been taken into account by the European legislator, e.g. on the frequency of the valuation of assets under management. However, some concerns remain, such as the recent proposals of the European Commission regarding the strict distinction between open and closed-ended alternative investment funds based on the possibility of redemption opportunities.
The group has currently not published any joint positions on this topic. However, every participating organisation has developed its own, very specific position papers. To learn more about the subject please view the individual participating organisations.
Solvency II – Directive on the Taking-up and Pursuit of the Business of Insurance and Reinsurance
Solvency II is a project by the European Commission to reform the insurance supervisory regime in Europe. Its main focus lies on the capital requirements of insurers that are needed to guarantee stability in the European insurance market and to reduce the risk of insolvency. The Solvency II Directive was adopted in 2009. However, due to necessary technical adjustments by the Omnibus II Directive, Solvency II will only come into effect in January 2016.
The European Real Estate Forum welcomes the efforts of the European institutions to improve the stability of insurance companies by the Solvency II directive. However, we are concerned that this purpose will be compromised by the approach taken in the directive. The construction of the Standard Model is likely to reduce flexibility for insurance companies to match real estate returns with the needs of their policy holders and will encourage insurance companies to decrease their real estate allocations. As a consequence, their portfolios will become less diversified and more vulnerable to economic shocks.
One issue that contributes towards the undesirable consequences set out above is the level of the property risk shock factor. The fixing of capital requirements through pre-determined market shock factors is a short term approach and not suitable to a long term investment asset such as real estate. Moreover, the property risk shock factor of 25% is based only on UK market data. The UK property market has consistently suffered higher volatility than most other European markets and so should not be treated as representative of those markets. According to the IPD Solvency II Review, the capital adequacy requirement for insurance companies’ European real estate investments could prudently be reduced to a maximum of 15%. We therefore welcome the inclusion of a revision clause into the Solvency II package according to which it will be possible to reappraise the existing data for the evaluation of real estate risk within five years. This leaves the possibility open to continue to collect long-term data from all EU real estate markets and to determine a risk factor that truly reflects the realities of the EU institutional real estate market.
We also advocate that loans secured by mortgages on commercial property and loans secured by mortgages on residential rental property should be treated as type 2 exposures under the counterparty default risk, as currently foreseen for loans secured by mortgages on residential property. As well as promoting a diversified commercial property lending market, giving loans secured on rented property the same regulatory treatment as retail loans secured on residential property would encourage European insurers to further diversify their investments into an asset class in which they have not traditionally invested, thereby reducing their own vulnerability to future financial shocks.
PDF IPD Solvency II Review (April 2011)
Summary: This report offers a detailed review of the Solvency ll risk based regulatory framework proposed for defining insurance company capital adequacy. The study focuses specifically upon real estate, and was funded by a consortium of seven key trade bodies, each supporting an aspect of insurance company investment in property and more broadly.
PDF IPD Solvency II Update (September 2011)
Summary: This report offers an update of the original study on the bases of new data.
SII and securitisation 2014 submission to EIOPA (January 2014)
CREFC and INREV recommendation to EIOPA to allow for certain commercial mortgage backed securities (CMBS) to qualify for ‘Type A’ solvency capital treatment by reference to objective qualitative criteria.
IORP II – Directive on Institutions for Occupational Retirement Provision
The European Commission has indicated its intention to come forward with a proposal to improve the governance and transparency of occupational pension funds and to create a level playing field with insurers. In light of insufficiently comprehensive data, solvency capital requirements will not be covered.
Like with Solvency II, the real estate investment industry is concerned that an unduly high solvency capital requirement will be introduced for pension funds real estate investments in the future. There is a clear risk that the 25% from Solvency II might be imposed on pension funds as well, should the European Commission decide to propose quantitative requirements. Our industry maintains that a capital requirement that is based exclusively on the UK market, cannot be representative figure for Europe as a whole.
PDF Property industry response to EIOPA consultation on the IORP QIS
Summary: This position paper is a joint property industry response to the EIOPA consultation on the quantitative impact study on the review of the IORP Directive. The organisations support the overall objectives of the legislative initiatives to stabilise the financial markets and lower systemic risk, including the objectives of the White Paper – An Agenda for Adequate, Safe and Sustainable Pensions1. However, the paper highlights some concerns with EIOPA’s proposal to apply significant features of the Solvency II (SII) framework to the IORP Directive.
The content and views expressed in the documents published on this website are the sole responsibility of the undersigned organisations of concerning document and may not represent the views of all participants in this Forum.