EIOPA has expressed concern about the development of real estate markets in its latest Financial Stability Report on primary insurers, reinsurers, and occupational pension funds. The supervisory authority points out that real estate is crucial for the stability of pension funds. However, direct and indirect investments in commercial and residential properties accounted for only 5.7% of total capital investments as of late 2023. Including all real estate-related assets (including structured debt securities), this figure rises to 9.9%.

The report emphasises that the real estate sector is closely linked to the entire financial system. A weakening real estate market could jeopardise financial markets, credit availability, and economic growth, potentially triggering a general economic crisis. „Such systemic risks can have cascading effects on insurance companies' investments, liabilities and overall stability“ ,the report states. Commercial real estate prices in the Eurozone fell by 8.9% in the fourth quarter of 2023 compared to the same period in 2022. But this figure only represents a European average. Around three quarters of all real estate investments are in commercial properties, whereas the residential sector has shown relatively stable performance.

In terms of country comparison, most real estate investments are concentrated in Germany, France, Belgium, the Netherlands, and Italy. Germany led with around 230 billion euros, primarily invested in packages of mortgage loans, followed by funds.

EIOPA identifies valuation as the biggest risk in real estate. The calculation methods often do not correspond to real values, especially in volatile markets. Additionally, real estate liquidity decreases during turbulent times. The correct valuation of existing properties becomes particularly challenging when observable market prices are lacking. According to EIOPA data, German insurers valued their real estate 4.3% lower in the past year compared to 2022, following several years of valuation increases.

About half of the European insurers monitored by EIOPA invest in private credit/debt. These investments, defined under Solvency II as non-traded/non-listed corporate and subordinated bonds, as well as unsecured loans, account for 3.4% of all capital investments by the end of 2023. For German insurers, corporate bonds make up the majority of private credit/debt investments.

EIOPA raises concerns about the subjective nature of valuation, and valuation methods in the private credit/debt sector. These methods often fail to adequately consider fundamental factors and market conditions, leading to potential timelags. Moreover, illiquid secondary markets contribute to highly uncertain valuations, with investment performance strongly influenced by interest rate developments. Last but not least, it is important to understand the impact of market and credit cycles on risk.