Solvency II is Europe’s framework for an entirely new harmonised European solvency regime for insurers. Full implementation of the Directive is expected to be by 1 January 2014. The FSA has announced an extension to the application window for approval of internal models, from 31 May 2012 to mid-2013 (and firms will be allocated submission slots for applications between 30 March 2012 and mid-2013). Real estate fund managers should therefore continue to push ahead with their planning, be aware of the potential consequences of the introduction of Solvency II and think about ways in which its impact may be mitigated.
The key issue for real estate fund managers is that the capital charge that an insurer will have to make in respect of real estate assets will be substantially higher than capital charges over some other asset classes, such as debt. This will mean insurance companies are likely to invest less of their overall portfolios in real estate assets. In fact, a survey conducted by Preqin in late 2010 found that more than 25 per cent of insurance companies asked said they expected to commit less to private real estate funds under Solvency II than they do currently. This could clearly have a very significant impact on the flow of money into real estate funds and managers should be considering what they can do about this.
One possible solution might be a move to more debt-based products rather than equity-based as it is likely that under Solvency II insurance companies will find it much more attractive to lend against real estate assets rather than to own them.