In its response to the consultation paper on the quantitative impact study (QIS) for the revision of the Directive, the European Association of Paritarian Institutions (AEIP) described the European Commission's proposed capital requirements for real estate as "simple-minded".
The association argued that the draft technical specifications on real estate should also factor in discounted cash flow models when calculating capital requirements. "Real estate, as long-term investment, provides duration and anti-inflation effects that support IORPs efforts to close the duration gap between fixed income assets and liabilities", it stated.
AEIP argued that, as proposed, a simple downshift of 25 per cent in the value of investments in real estate coupled with a fixed correlation of 50 per cent to the interest rate risk part could "seriously" overestimate capital requirements. The association suggested instead that if discounted cash flow models are used to calculate the market value of real estate investments, they should also be applicable when calculating the capital requirement for the corresponding risk.
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