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REAL ESTATE HAS BEEN A POPULAR ASSET CLASS WITH INSURANCE COMPANIES ACROSS THE GLOBE FOR A NUMBER OF YEARS. There are multiple ways for insurers to invest in the asset class, including direct real estate ownership, real estate debt, private mortgage loans, and mortgage-backed securities (MBS). Real estate investment trusts (REITs) are yet another avenue that may be worth pursuing, but they have historically tended to be overlooked or underutilized by most insurers.
That is unfortunate, in our view, because we believe an appropriate allocation to REITs can play a valuable role in an insurer’s investment portfolio. Here we discuss the potential benefits of REITs and other considerations for global insurance companies, plus why now may be a particularly opportune time to take a closer look at this often unsung asset class.
Insurance investment in property
Insurance companies are often thought of as conservative investors, which helps explain why they have historically been drawn to investing in “bricks-and-mortar” assets like real estate. The size of the allocation to real estate typically varies by country and insurance company type and also takes a variety of different forms, but broadly speaking, it is clear that real estate has an important place in the investment portfolios of many global insurers.
Let’s take the example of European insurance companies (both life and non-life), whose balance-sheet investment assets total €8.5 trillion. European insurers invest 9.0% of their aggregate investment assets in real estate, which is split among mortgages (2.9%), direct property (1.9%), real estate funds (1.8%), equity of firms related to real estate (1.3%), and corporate bonds issued by firms engaged in real estate activities (1.3%).1
The US life insurance market, which comprises US$4.5 trillion in general-account investment assets, is even more heavily invested in the real estate sector. The average US life insurer’s allocation to direct real estate is 14.0%, divided between mortgage loans (13.4%) and direct real estate (0.6%) — which, when combined with a 9.5% allocation to MBS, adds up to considerable exposure to the real estate sector.2
Finally, while the Asian insurance landscape is very diverse, companies across the region have displayed growing demand for real estate. The average Asian life insurer’s allocation to direct real estate is 1.3%, with wide variations across the region, reaching as high as 4.4% in Taiwan.3 Asian insurers have also shown interest in investing in other types of real estate, most notably overseas real estate debt in the US and Europe.
Private real estate vs REITs
For most insurance companies, the rationale for investing in private (or direct) real estate is to seek to increase the current yield, total return, and diversification potential of the overall portfolio. However, we would argue that such lofty ambitions are not always realized and can be better achieved via…
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1Source: European Insurance and Occupational Pensions Authority, as of 30 June 2020. | 2Sources: NAIC statutory filings for life insurance companies as of 31 December 2019, S&P Global Ratings research as of September 2020. | 3Source: Cerulli Associates, as of 31 December 2019.