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IPE special report May 2018

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Germany confirms real estate stress tests

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GERMANY – Financial services regulator BaFin has confirmed that it will include direct investments in real estate in so-called “stress tests” for German life insurers and certain pension funds.

A BaFin spokesman in Bonn said the inclusion of real estate investments in the tests would likely begin at the end of March. He added, however, that the regulator had not decided what kind of percentage drop would be assumed for the purpose of the tests.

IPE reported that BaFin was considering such a move on November 30. Currently, the regulator subjects life insurers and certain pension funds – including Direktversicherungen and Pensionskassen – to three types of stress tests.

The test ‘R-10’ envisions a 10% drop in bond prices, while the ‘A-25’ test assumes a 25% plunge in equity prices. The third and most stringent test, ‘RA 25’, envisions a 20% drop in equity prices and a 5% drop in bond prices.

The spokesman also clarified that only those real estate investments made with the investor’s own capital would be stress-tested.

Investments the life insurers and pension funds have made in real estate funds will not be stress-tested, as these investments are usually partly financed by borrowed capital.

As a result, Daniel Just, head of investments at German pension fund Bayerische Versorgungskammer (BVK), expects that the institutional investors in question will consider raising their investments in real estate funds.

“Because the simulated drop in prices only applies to (real estate) investments made with one’s own capital, the attractiveness of funds as an alternative to directly investing will grow,” Just told the Börsen Zeitung.

Just added that the BVK, a €35bn scheme that insures professional employees in the state of Bavaria, would itself set aside more “new money” for investment in real estate funds.

In Germany, the market for Immobilien-Spezialfonds, or real estate funds created specifically for institutional investors, is around €17bn.

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