Insurance companies are set to exploit the void created by higher capital adequacy requirement for banks – forcing them lower their exposure in the commercial property market, enabling insurers to issue senior debts.
As the traditional providers of senior debt – the leading banks of Europe and Britain, back out from the commercial property market, insurers will continue to strengthen their position in the first half of 2011, says the latest report by property consultant CB Richard Ellis.
“The introduction of Solvency II (rules) will encourage them (insurers) to lend more aggressively, expand existing teams and build up the necessary platforms and infrastructure to achieve this”, the report said.
AXA Real Estate has already set up a £1.2 billion fund to capitalize on the opportunity.
Leading insurers are “already providing conducive terms and conditions, although their current high amortisation costs will need to become more competitive if they are to gain a larger market share”, the report by CBRE observed.
The Basel III requirements for higher core capital requirements for banks and solvency II requirements for insurance companies – both come into effect in early 2013.
Presently 69 financial firms lend to UK property developers, 20 percent of which are German pfandbrief banks, UK non-clearing banks and non-UK European banks constitute another 14.5 percent each while remaining 13 percent is contributed by insurance companies, CBRE observed.
“We expect to see a reduction in senior lending market liquidity, mainly reflecting increased financing costs as the twin effects of Basel III and the huge amount of loans coming to maturity filter in to the market”, the report said.
Some lenders including investment banks, German pfandbrief banks, building societies, clearing and non-clearing banks will have to re-assess their exposure in the property market, due to stricter capital requirements.
However, the report concluded that German pfandbrief banks will continue to dominate the commercial property lending space, giving advances to properties located at prime spots and backed by strong covenants.