The European Public Real Estate Association (EPRA) is stepping up its advocacy for a lower risk charge for REITs under Solvency II rules under its new CEO Dominique Moerenhout.
The reduction of the capital requirements for listed real estate under the EU’s Solvency II regulations is a key priority on the advocacy front, Moerenhout told PropertyEU ahead of the annual EPRA conference in London this week. The regulations became fully applicable at the start of 2016 and require insurers to weight “riskier” investment assets classes more heavily in their capital allocation.
‘Listed real estate is categorised within the general equities asset class under the rules and therefore attracts heavier capital requirements,' Moerenhout said. 'Our objective is to reduce these to the level of direct property investments as many academic studies have shown that the performance and volatility of real stocks converge with bricks and mortar on average after about 18 months, so they should be treated no differently under Solvency II.’
Insurers that invest in real estate equities are required to allocate a 39% risk charge compared with 25% for non listed or direct real estate. The current level of the risk charge is excessive, claims Mark Abramson, a REIT fund manager and co-founder of Andama Investments.
‘European REIT regimes have fallen between the cracks between tax law and regulation, with the result being that the European REIT sector has failed to deliver on the public policy objective it was designed for,’ said Abramson.
‘REITs are not a tax give-away. There is a public policy logic underpinning them. For a long time, EPRA has been contemplating an advocacy programme for a different regulatory treatment of the REIT sector and a readjustment of the Solvency II capital requirements. EPRA’s new CEO is of the same mind in terms of the need for advocacy and EPRA is now putting serious resources behind it. Creating a push like this is necessary.’