The continuing “low for longer” yield environment and persistent slow economic growth are driving insurers to re-evaluate their portfolios in the search for income.
This means that the shift by this community in recent years toward private market assets – including real estate – is set to continue, according to Blackrock.
A new piece of research commissioned by the investment manager and conducted by the Economist Intelligence Unit found that the number of insurers with more than 15% of their portfolio in private market assets had more than quadrupled to 26% from 6% three years ago.
There is widespread evidence that the property market has already been a beneficiary of this move. Insurers have been competing for direct assets, as well as flocking to the debt market (see box) with new entrants such as Legal & General and MetLife joining more established participants like French giant AXA.
However, the report predicted that the number of insurers invested in private market assets would nearly double again to 46% by 2017.
This spells the end of the “buy your bonds in the morning, relax in the afternoon” approach to life, as insurers are now faced with a far more complex operating environment.
And it means a continuing boom – or depending on where you sit, increased competition – for real estate. Lacklustre yields from traditional fixed- income instruments will continue to drive many insurers up the risk spectrum and straight into direct real estate, real estate debt and infrastructure assets, according to Blackrock.
The research, which covered insurers with over $6.2trn (£3.8trn) of assets globally, found that one in three firms intends to increase its risk exposure over the next three years, compared with 15% that intend to decrease risk.
And real estate is the leading asset class to which investors plan to increase their allocation over the next year, with 36% of the 423 firms surveyed planning to up their investment.
The growing popularity of real estate means that while, initially, flows were strongest for core property, more investors are now turning their attention to opportunistic investments outside their home markets.
Simon Treacy, BlackRock Real Estate’s global chief investment officer and head of US equity, says that insurers are competing for a range of opportunities including properties in hard-hit European peripherals, where values are still around 30-50% below their peak.
Other strategies, including high-yield debt and public REITS, will also gain in popularity, adding to already intense competition from investors in these sectors, he says.
Guardian Financial Services: debt adds diversity
In October 2013 Guardian Financial Services, a UK life insurer, made its debut investment in commercial real estate debt. It chose debt specialist Renshaw Bay to manage its £350m commitment to the sector.
The firm had traditionally used corporate bonds to match its £8bn book of annuity liabilities, but those assets have looked less attractive in recent years.
Paul Dixon, Guardian’s chief investment officer, says that a limited supply of corporate bonds and tight credit
spreads has made it more difficult to achieve targeted returns.
The company used real estate debt to diversify out of traditional investment-grade fixed-income bonds – a play that comes with high levels of security and an attractively low default rate.
But it is not without risk. “The simplest mistake would be to finance the wrong asset,” he says, “or to pick the wrong sponsor – somebody who is not thorough and robust in their business modelling and their management of the business.”
With an eight-person group to oversee more than a total of £15bn of assets, appointing a specialist manager – an “established team with a strong track record” – to handle the real estate debt mandate was seen as the best route.
He also says insurers should not rush in to the first opportunity that comes their way, but set something like a three-year time scale to invest. Guardian is looking at another £350m scheme for infrastructure debt, which will edge the proportion of the portfolio invested against annuity liabilities into private asset classes towards 10%.
bridget.oconnell@estatesgazette.com
