Real estate as a return booster: insurance companies rely on boom!

Real estate as a return booster: insurance companies rely on boom!

In today's financial world, insurers and pension funds face significant challenges. Interest rates continue to fall and many institutions are struggling to generate the returns they need. According to the Trade newspaper The need to minimize risks in asset allocation is becoming increasingly important. One solution that is increasingly coming into focus is investing in real estate. The ongoing boom in real estate values ​​could serve as a possible lifeline for these institutions.

Current economic conditions, particularly post-pandemic inflation, have also influenced interest rates in Europe. While the United Kingdom began a turnaround in interest rates at the end of 2021, the Eurozone followed suit from summer 2022. Nuveen reports base interest rates peaking at 4.5% for the Bank of England and 5.25% for the European Central Bank between 2023 and 2024. More than 80% of pension fund representatives surveyed expect a longer period of higher interest rates, which will improve the financial position of many defined benefit pension plans.

Real estate as an investment field

Insurance companies and pension funds, which have traditionally invested in bonds and stocks, are showing increasing interest in diversifying their portfolios by investing in residential and commercial real estate. This asset class not only offers potential returns, but also protection against inflation risks. Combined with current economic trends, this could represent a promising strategy to meet return requirements while minimizing risks.

The EQuilibrium survey 2024 shows that many defined benefit pension plans in Europe are taking advantage of the higher interest rates of fixed income instruments to reduce portfolio risks. This opens up greater scope for exposure to alternative asset classes that can simultaneously pursue environmental and social goals.

Alternative asset classes in focus

To meet market challenges, pension funds are increasingly exploring alternative asset classes such as infrastructure debt, C-PACE, direct lending and natural capital. These issues are becoming increasingly important as they not only offer returns but also support sustainable development.

• Infrastructure Debt: Mehr als 40% der deutschen Pensionskassen und britischen staatlichen Pensionsfonds möchten ihre Allokation in private Infrastrukturprojekte erhöhen. Diese bieten nicht nur stabile Einnahmen, sondern unterstützen ebenfalls die Dekarbonisierung.
• C-PACE: Ein Finanzierungsmechanismus in den USA, der Rückzahlungen durch Steuerentlastungen sichert. Der Markt für C-PACE-Kredite wächst und reagiert auf die steigende Nachfrage nach nachhaltigen Gebäuden.
• Direct Lending: Diese Anlageklasse bietet Unternehmen Kapital, die keinen Zugang zu öffentlichen Märkten haben, und ermöglicht regelmäßige Einnahmen bei gleichzeitigem Inflationsschutz.
• Naturkapital: Investitionen in Agrar- und Waldland gewinnen an Bedeutung, da sie nicht nur stabilere Renditen generieren, sondern auch zur Reduzierung von Treibhausgasemissionen beitragen.

Developments in interest rates and real estate values ​​present both challenges and opportunities for financial institutions. Smart diversification into real estate and alternative forms of investment will be key for insurers and pension funds to address future economic uncertainties.