Real estate and real assets have been a dependable part of insurance portfolios for decades, with strong performance even through difficult times. As we find new footing in the wake of the COVID-19 pandemic, some see real estate’s volatility as a cause for hesitancy. However, we see indications that real estate investments are becoming more attractive to insurers, particularly through private debt and private equity vehicles. We’ve compiled the five most compelling reasons why real estate investment presents a significant opportunity for insurers.
A continued hedge against inflation—As the cost to build rises with inflation, existing properties hold or increase in value. For rental properties, rent payments rise with inflation, and escalator clauses add additional protection.
Rising interest rates can benefit both real estate equity holders and lenders—Yield from newly-issued mortgages and refinancing activities increase as interest rates rise.
Relaxed capital requirements for real estate investments—In 2021, the National Association of Insurance Commissioners (NAIC) lowered the Risk Based Capital (RBC) base factor for Schedule A investments and increased the RBC for Schedule BA investments. This means that insurers have reduced requirements for investing in direct ownership of equity real estate.
Long-term investment horizons align nicely with longer-duration liabilities (for life companies)—Characteristics of commercial real estate (CRE) lending like fixed-rate interest payments and ten-plus-year terms mitigate risk and benefit both sides of the balance sheet.
Infrastructure-based real estate investments can play into ESG/sustainable investing strategies and offer further tax-based incentives—Recent subsidies and tax incentives for climate-related infrastructure investments can lead to higher potential returns on those investments.