Insurance companies are favouring unlisted real estate over listed options as new regulatory constraints make the former more appealing from a valuation point of view.
This is according to Frédéric Tempel, who is the Citywire + rated global head of listed real estate at AXA IM.
According to Tempel, the demand for listed real estate comes mainly from pension funds. ‘The regulatory framework is creating a situation where insurance companies as well as banks are trying to optimise their choice under the rules determining the cost of capital for each category of investment.’
He added that regulation is pushing insurance companies towards private real estate because of a more favourable cost of capital.
‘Real estate exposure via private debt is very attractive for insurance companies because the cost of capital of debt instruments under Solvency II is very low. Private equity might also be an interesting option for insurers, but not as profitable as private debt.’
Back to the Seventies
Speaking about the property sector as a whole, said that real estate is now becoming again a core asset class after being used for diversification purposes for a long period.
‘The longer we stay in the current low-inflation and low-GDP growth environment, the more people will go back to real estate investments. Before the 1970s, most institutions were quite keen on real estate because it provided income and inflation protection.'
While inflation protection in today’s low-interest rate world is no longer an issue, Tempel says that investors more than ever need a stable source of income as bond yields are getting narrow.
‘At the end of the day, I need an income stream and the easiest way to achieve it is real estate. Insurance companies in the early 70s had real estate allocations that were triple the levels they have today.'
‘They disinvested from property in the 80s and 90s in the process of sophistication of financial markets. This happened also because some instruments, such as corporate bonds, delivered incredible risk-adjusted returns.’
Nowadays we might be heading in the opposite direction, Tempel said. ‘No history repeats itself, but the hunt for yield is feeding the long-term interest for real estate.’