Tag: Solvency II regulations

10 November 2017 – Grupo Aseguranza

Needs must. That is the main reason that has led – indeed, almost forced – Spain’s insurance companies to look at real estate assets as another, better alternative to achieving additional returns, which are not currently being generated in the financial markets (…).

The second reason that has caused the insurance sector to focus more intently on investment in the real estate sector has been the recovery of the rental market, primarily the office segment, which is where the majority of investments from the insurance sector are targeted (…).

The third reason for the increase in real estate investments stems from the Solvency II regulations. According to this regulation, properties require a provision equivalent to 25% of their appraisal value for capital consumption purposes, which is below those required for other formulae such as variable income, which need almost 50%.

More in Madrid than Barcelona

These 3 reasons have served as fuel to boost investment by insurance companies in properties. (…) In this sense, the stock of properties, measured in square metres, increased by 2.8% during 2016, from 3 million m2 in 2015 to 3.27 million m2 in December 2016. The growth in Madrid amounted to 7.5%, whilst in Barcelona, the figure decreased by 0.3%; in the rest of Spain, it increased by 0.4%.

According to data from ICEA, the Spanish insurance companies hold €287,000 million in their investment portfolio: of those, 3 out of every 4 euros are invested in fixed income and 3.7% is invested in property.

2017 will depend on the buffer required

Miguel Ángel Rodríguez, the ICEA’s external collaborator, in conversation with Aseguranza, highlighted that the increase in real estate investments this year will depend to a large extent on the capital buffer that the insurance companies need to have. The economic conditions are ripe, but the insurance sector is always conservative. The only numerical reference is the survey performed for the report “Real estate investments in the Spanish insurance sector. Data as at 2016”, which shows that only 7% of companies are considering divesting their properties, whilst almost 40% are planning to increase this kind of investment.

The report also asks how the entities are planning to undertake these new property purchases: more than half of them, 52%, are inclined to invest directly, compared to 12% who would do so indirectly, in other words, through investment vehicles. The remaining 36% would combine both methods (…).

Returns of 3%

Another fact that the report measures is the annual operating return on the appraisal value that insurance companies can expect to obtain from their real estate. On average, the figure amounts to 2.9%, with the highest yield being reported in Barcelona (+3.4%), compared to Madrid and the rest of Spain (+2.8%).

By type of property, the highest returns for insurance companies are generated by parking spaces (+4.5%), followed by commercial properties (+4%), offices (+2.8%) and homes (0.1%).

Along with profitability, appraisal values also rose in 2016, by 1.7% per m2. They grew by 1.3% more in Barcelona than in Madrid. Similarly, the vacancy rate stood at 18.8%, almost the same as in 2015. Meanwhile, the average rental income on properties owned by insurance companies rose by 0.3% to reach €12.27/m2/month. In Madrid, rents cost €18.60/m2/month and in Barcelona €12.80/m2/month.

Original story: Grupo Aseguranza (by Manuel Chicote)

Translation: Carmel Drake