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鈥檚 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鈥檝e compiled the five most compelling reasons why real estate investment presents a significant opportunity for insurers.
- A continued hedge against inflation鈥擜s 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鈥擸ield from newly-issued mortgages and refinancing activities increase as interest rates rise.
- Relaxed capital requirements for real estate investments鈥擨n 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)鈥擟haracteristics 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鈥擱ecent subsidies and tax incentives for climate-related infrastructure investments can lead to higher potential returns on those investments.
Real estate investments, however, are not without challenges. Operational inefficiencies, reporting requirements, the risk for error and other obstacles necessitate specialized technologies and expertise to maximize returns. To learn more about addressing these challenges with a technology and services solution like 天美传媒鈥檚 Singularity, download our "Insurers Get Real About Real Estate: 5 Reasons to Expand Your Portfolio in 2023" eBook.