Both in her day job and at INREV, Marieke van Kamp is firmly focused on Solvency II. IQ talked to her about how Solvency II is likely to impact the real estate industry. From her deep knowledge of the regulation, she offers some enlightening and instructive insights.
“Solvency II regulation has been with us for the best part of the last nine years. It’s generated thousands of pages of commentary and absorbed many hours of debate. It’s also cast a fairly major shadow over the real estate industry,” says Marieke van Kamp, Head of Real Estate & Alternatives at NN Group.
But she acknowledges that, as a piece of prudential regulation, Solvency II occupies an important place. “This regulation is clearly in line with European regulators’ views that an overly leveraged economy is unsustainable and undesirable. The original objectives of the regulation were rooted in good sense at a time when real estate was arguably in need of better oversight, and individuals who looked to institutional investors for their savings and pensions products needed greater protection.”
However, now that it is in its near final form, van Kamp sees Solvency II as something of a blunt instrument that has become far more complicated than it probably needs to be. As such, she believes that Solvency II will significantly impact investors’ decisions about their allocations to real estate in the medium term, at least.
The devil of Solvency II is in the detail and van Kamp explains very clearly why some of these details will cause problems for investors. “The look-through principle is the key factor for many investors because the ability to take risk depends on leverage and, if this is capped at 50%, the level of deployable capital is reduced. Philosophically, the commitment to real estate as an asset class hasn’t changed but allocation is dependent on exposure and this is defined by the equity invested. So if leverage is reduced as the result of Solvency II, real estate exposure will go down because there will be less actual capital to invest.
Alongside leverage sits the solvency capital requirement (SCR) - the infamous 25% shock factor. The arguments about its inappropriateness are well known, but van Kamp emphasises the effect this element of Solvency II could have on investment strategies. It is, she says, a mistake to use the same measure of risk for a single stable asset as for a diversified fund operating in a mix of different sectors across multiple jurisdictions. Not only is it an inefficient measure of risk but it could also reduce investor appetite for diversification which, for many, has long been one of the key benefits of non-listed real estate investment.
Van Kamp observes that the Solvency II team at EIOPA is shaping the IORP regulation so there’s a chance that the approach it adopted to risk and leverage for Solvency II could be replicated in the long term in the pensions regulation. And if both pension funds and insurance companies – the bulk of institutional investors – reduce their allocations as a result of a lower appetite for leverage, the consequences for the real estate market will likely be fairly significant.
There will be broader knock-on ramifications too. The new European Commission may well see sustainable investment platforms as the engine for long-term economic growth across the union, but there’s a perceptible, if silent, inference from van Kamp that, with Solvency II, Brussels may just have shot itself in the foot in terms of delivering this new agenda.
However, she also recognises that it may be a question of time. Investors with a time horizon of 20-25 years are unlikely to desert the asset class in droves. And on the upside, investors exiting real estate will create opportunities for new entrants to find a way in.
It certainly isn’t all gloom. Solvency II will reduce volatility and, depending on their specific points of view, investors could find this helpful. It has also helped to make real estate more transparent as an industry, though this will come at a price for fund managers, in particular. “There’s no doubt that the rigorous and detailed reporting requirements of the regulation will mean significant additional burden for many managers. INREV has a key role to play in helping here. For example, by setting out a consistent approach to reporting in an effort to reduce continued requests from investors for a slightly different version of the data each time. A lot is already being done in this respect, particularly through the Guidelines, the Standard Data Delivery Sheet and the DDQ, as well as through workshops and training.”
But that there is still further to go. “As the industry body for the non-listed sector, this is at the heart of what INREV needs to do and we’re firmly focused on meeting this objective.” Referring to the planned review of SCRs under Solvency II by 2018, she also sees an important role for INREV to update data showing the real volatility of real estate investments. Going further, van Kamp notes that INREV can play an important role more generally by helping policymakers better understand how real estate investment actually works. The objective is to ensure that any future regulation affecting the real estate market is more measured and fit-for-purpose.
On the subject of new regulation, Marieke sees this as a potentially positive way to further professionalise the industry. She mentions that sustainability is high on the list of priorities for the European Commission. With a Masters in Real Estate Management and in Sustainable Development herself, it’s a subject that’s close to her heart too. It’s also an area that INREV is looking at closely. This bodes well for greater alignment between policymakers and the industry in the future.
Solvency II was seen as the death of real estate. This was a dramatic perspective but we’re still here.
In the meantime, Solvency II remains a hot topic. “In 2010, Solvency II was seen as the death of real estate. This was a dramatic perspective but we’re still here. The current low interest rate environment has dampened some of the negatives and I can’t see things changing anytime soon so far as rates are concerned. However, the jury is still out because the combination of high interest rates and the implementation of Solvency II would definitely reduce the attractiveness of real estate relative to fixed income. That would be an uncomfortable place to be, but our industry is resilient and the work we’re continuing to do is all about preparing ourselves to deal with that challenge when it comes”.