The insurance industry is connected in several ways to the real estate industry. It is one of the largest investors, as insurers are bound to have a stable investment portfolio for the funds
entrusted to them in the form of premium payments for life and other insurances.

The Covid-19 pandemic has accelerated existing trends which will continue to shape the real estate sector in the years to come. Digitisation, remote working and online shopping are driving these trends. The industry’s environmental, social and governance agenda reinforces them.
To mitigate the disastrous effects of lockdowns on their economies, many states have made unprecedented levels of fiscal and monetary stimuli available. This loose monetary environment helps keep interest rates low and reinforces investment in the real estate sector, which has always been considered a safe haven during crises. At the same time, real estate offers compelling yields for investors.
Lenders, however, have adopted a more cautious stance. Increased uncertainty with regards to businesses being able to operate and earn the money to repay loans against the backdrop of global supply chain disruptions have led to tougher lending criteria. Government subsidies and postponed payment obligations are expected to end soon. Inevitably, there will be some distressed debt as a result. Banks that have pulled back have at the same time opened up the opportunity for non-bank lenders.

Yet, the cardinal issue in real estate remains: the solvency of tenants.

Residential vs. office sector

Residential real estate develops steadily, with housing investments being part of an ESG-driven search for affordable housing that includes environmental aspects in design and execution. The office sector, however, is subject to fundamental change.
Though offices in many regions have opened again and businesses have returned to normal operation for the time being, the disruptive forces of the pandemic have shown that other organisational structures and new ways of workforce interaction led to changing requirements in office space. Employers and employees alike see the benefit of avoiding long commute times by working from home. Although voices proclaiming the end of the office have become quieter, it is unlikely that the majority will switch to pure remote operation.
Rather, mixed working models will be implemented, leading to major shifts in the market. This trend also coincides with an increased focus on quality of living. Above all it has to be borne in mind that, as time goes on, the upsides and advantages of actual interaction among colleagues in the office will retain their importance even though office space may be used differently than in the past.
The hospitality and retail sectors have been hit the hardest because most capital will continue to flow into other sectors that promise greater stability or even growth. The physical retail sector was affected by an increasing shift towards online sales already before the outbreak of Covid-19, the exception being essential and convenience shopping as these sectors were also largely exempted from lockdowns.

Environmental affairs

Decarbonisation is an ubiquitous term nowadays. Although discussions about climate change have been around for the better part of the last half century, it is only in the past 18-24 months that these issues have received the indus- try’s focused attention. The dynamics of climate change are currently still driven by finance providers, who pledge many of their funds and products to the cause of acting responsibly and in accordance with ESG criteria. Larger tenants reinforce the dynamics by actively requesting ESG-compliant assets and thus boost the demand.
But environmental concerns are also found in many other contexts. Growth and expansion for instance inevitably lead to questions around soil sealing. This is defined as the covering of soil by buildings, structures, and other layers with completely or partially impermeable artificial material such as asphalt or concrete. It is one of the most intense forms of land take and often irreversible. Soil sealing is directly associated with other soil threats, for example soil biodiversity, flooding and landslides, soil compaction and soil contamination.
Most social and economic activities require some form of land take and sealed areas. An expansion of existing settlements puts pressure on sites previously being used for agricultural purposes. According
to the European Environment Agency, the main drivers of land take between 2000-2018 were industrial and commercial land use as well as the extension of residential areas and construction sites. In this period, land take in the EU28 amounted to 539 km2/year, consuming 0.6% of all arable lands and permanent crops, 0.5% of all pastures and mosaic farmlands and 0.3% of all grass- lands. To counter this development, a three-tiered approach is advised, which consists of limiting (L), mitigating (M) and compensating (C) soil sealing. Various measures such as green roofs, permeable surfaces for driveways, reuse of topsoil, but also de-sealing exist already and are among the issues any real estate developer must deal with.

The power of new technologies

New materials are being tested and introduced to make buildings more energy efficient and reduce the carbon footprint while stepping up durability as well as resilience against adverse climate conditions. As climate change, wildfires and floods appear almost every day in the news, developers, tenants and governments alike are keen on bracing themselves for the future. France for instance is actively seeking a way to “heatwave proof”
its cities to make them more liveable during hot summers. Urban heat islands are a new challenge, as they do not cool off during nights, putting strain on the population. At the same time, firefighters struggle to control blazing fires in the surrounding rural areas.
Technology is rapidly changing the way we live and work. Big data, artificial intelligence and IoT are key topics for any real estate development. State- of-the-art sensors can assist in predictive maintenance and optimise both usage and the energy profile of buildings.

Solutions for emerging risks

The insurance industry is connected in several ways to the real estate industry. It is one of the largest investors, as insurers are bound to have a stable investment portfolio for the funds
entrusted to them in the form of premium payments for life and other insurances. Furthermore, margins in real estate are still attractive given the low interest rate environment, and in case of a higher volatility of prices or an inflation in the Eurozone it is also a good hedge against that.
The real estate industry is also key to insurance companies’ operational business, protecting its clients against the adverse effects from the development and operation of assets. In traditional lines such as property insurance and general liability, prices have recently risen, reflecting the negative results insurers have experienced in a competitive low premium environment. Recent claims have reinforced the focus on business interruption, be it due to tenants going out of business or the increased awareness in the wake of the
Covid-19 pandemic that such events can endanger the very existence of a business operation.
Digitisation leads to new exposures in terms of cyber insurance for real estate operators in all sectors. Specific insurance solutions can help to counter the threat emanating from the cyber sphere. Less widely known products such as parametric insurances or loss of footfall insurance cover the probability of a predefined triggering event happening. They are detached from the former principle that damage to one’s own insured property is the only trigger for insurance coverage.
As far as real estate investment or asset management is concerned, there are an increasing number of financial professional liability claims. Insurance products like an Investment Management Insurance in the form of a multiline insurance bridge the gap between a cover for criminal deliberate acts of employees, directors and officers and a liability cover for financial loss due to wrongful professional acts. They are a valuable insurance proposition for real estate investment companies and fund managers.

Richard Krammer

Group Practice Leader Construction & Real Estate

T +43 664 810 29 63

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