Navigating the Storm: Challenges and solutions for property funds in today's economy


Amy Ferreira, development underwriter at Travelers Europe, explains how insurers are responding to risks in the property market.

Any individual or business managing property is facing one roadblock after another. For starters, interest rate hikes have raised refinancing concerns for borrowers of all types. In residential property, the number of first-time home buyers is approaching a 10-year low. Renting has become more difficult too, with typical rents expected to increase by 5.5% across London, according to research from Savills. This, in turn, will force more people to move farther afield and into a cycle of being unable to afford the deposit they need to step onto the property ladder. Such conditions are driving occupancy rates lower and increasing the cases of tenants looking to break their leases early.

Businesses are struggling too, generating reduced profits and even losses because they can’t pass their escalating costs on to clients. Widespread hybrid work is pushing office occupancy rates lower and increasing the vulnerability of the office sector. This leaves landlords and property funds unable to turn higher rents into greater yields and stronger returns for investors. Though interest rate cuts should help in the months ahead, borrowing costs will remain well above where they have been in recent years.

A higher bar for property funds

So where does this leave property funds that need insurance? They have options but will face stricter scrutiny to demonstrate they have favourable risk characteristics. For example, they can expect insurers to review occupancy levels and rent collection figures in greater detail. Insurers will be assessing each portfolio to determine whether property that is concentrated by type or geography might increase risks. Insurers are scrutinising loan-to-value levels as well: although 60-70% loan-to-value levels were acceptable previously, insurers are now favouring portfolios with lower loan-to-value levels to reduce the risk of losses. Insurers will continue assessing break terms in tenancies in relation to refinancing dates, as liquidity problems could result when those dates are out of sync.

Property fund managers must anticipate their potential consequences in this environment. If they generate lower returns, for example, investors may find alternative investment strategies more attractive, and have more investors looking to redeem. Will they then apply gates to funds, whilst they try to liquidate assets within the fund? Restrictions on redemptions could generate increased complaints and claims. When their mortgage repayments increase, will they be able to fund them? Does their due-diligence process ensure new tenants can cover their rent for the lease term? Established insurers will take on property risks – they just need extra assurance that insureds can weather the challenges of the current economy.

Whilst challenges are emerging in this space, insurers that make strong client connections and understand their risks can find creative solutions to meet complex needs. It’s important to find an insurer that is energised by today’s challenges – and committed to helping clients find protection that gives them confidence.

The information provided in this document is for general information purposes only. It does not constitute legal or professional advice nor a recommendation to any individual or business of any product or service.


About Travelers

We wrote the first auto insurance, the first aircraft liability insurance, and even the first personal accident cover for astronauts.

In today’s fast-changing world, this  heritage of adventure really counts. With an extended network of underwriting, claims management, and industry experts in 125 countries, we’re here to insure your clients’ ambitions – no matter their size and scope. Our expertise and experience deliver policies that help them continue their journey.

With businesses facing ever more emerging and evolving issues, our suite of insurance products offers bespoke cover for each risk, and our commitment to genuine, caring partnerships means we’ll always be there to advise and support our clients and our broker partners, – whatever the future holds.

The Travelers Companies, Inc. (“TRV”) is a leading provider of property liability insurance for motor, home and business. The Group has more than 30,000 employees and operations in the United States, Canada, UK and Ireland.

The group has total assets of approximately $110 billion, shareholders’ equity of $26 billion and total revenue of $32 billion, as of December 31, 2019. Our European based operations offer our customers a wide range of coverage through Travelers Insurance Company Limited, Travelers Syndicate Management Limited (Syndicate 5000 at Lloyd’s), Travelers Underwriting Agency Limited and Travelers Insurance Designated Activity Company.