Claudio Pacella, CEO of 65Plus – Gruppo Mutuionline in Italy and an EPPARG Board Member, shares his outlook on the Italian equity release market, and highlights the key role of funding in further development of the market.
How would you describe the current market for equity release in Italy?
Equity release in Italy is split between Reverse Schemes (Nude Proprietà) and Equity Release Mortgages (Prestiti Vitalizi). Nude proprietà has existed for a long time in Italy and accounts for a volume of 20-25,000 transactions each year, while Prestiti Vitalizi (PIV) has only existed since 2006, with regulation being recently updated in 2015.
Equity Release Mortgages are expected to grow since they are offered by regulated players with strict transparency procedures and in line with a ‘best practice experience’ curve, while Nude Proprietà operates based on a P2P process without any guarantee or standard process: the transactions are left to an unregulated negotiation between the parties, where the elderly are often on the weaker side.
How have Italian equity release providers been adapting to the pandemic? Is your company 65Plus able to conduct its business using online instruments? What are some of the challenges?
The pandemic has reduced the volumes originated, due to a market based on in-branch contacts with potential clients. Current players did not adapt that much, in relation to Prestiti Vitalizi.
A full digital process will be available in the first half of 2021, except for underwriting that remains an on-site step, since in Italy this is performed with a public notary.
The main challenge in Italy is still funding availability; this bottleneck has also led to a lack of offers, which could be addressed more rapidly if the funding need was fixed.
Your company 65Plus has joined forces with Gruppo MutuiOnline. What can you tell us about this collaboration?
Within Gruppo MutuiOnline, 65Plus is currently creating a joint offer with Centro Finanziamenti, the financial arm of the Group. Centro Finanziamenti will originate the loans as a lending entity, while 65Plus (as the product specialist) will be contributing through product design, distributor support and servicing.
Given that MutuiOnline is the biggest Business Process Outsourcer in the Italian banking arena, this initiative can rely on a strong operational base, which will allow for fast growth.
Concerning distribution, many agreements with nationwide major players will be operative.
What opportunities do you see for new funders and investors to enter the Italian market?
Italy is an opportunity, both in terms of volumes and quality, for both national and international new funders. The potential market is huge, since real estate held by over 60s are worth over € 1,5 trillion, while 1.5 million families are actually “house rich and cash poor”; this leads to a potential market similar to what we see in the UK.
On the quality side, we can agree that Italy now has a rather stable real estate market, where periodic fluctuations indicate that we have now more upside then downside value.
This is a market that has been established over the last 14 years, with thousands of loans underwritten and no reputational or legal issues.
How do you assess prospects for growth in the equity release market in Italy for the year to come?
As mentioned, growth will be led by funding availability. Potential clients, distributions, operations and servicing are already available on the market. What we are seeing is a growing interest from institutional investors. For this reason, we are confident that 2021 will be a year of change, leading to a fast-growing market, with a view to closing the big gap that we have today with the UK market.
Politicians and institutions are also spotting the social and economic positive impact of greater development of Prestiti Vitalizi. We are confident after 14 years of careful seeding of the product.
Pedro Pinto Coelho, Chairman and CEO of Banco BNI Europa and EPPARG Board Member, shares his views on prospects for growth of equity release and cross-border funding against the backdrop of COVID-19.
You have experience of cross-border funding of equity release in Europe, noting that Banco BNI Europa from Portugal, of which you are Chairman and CEO, launched a collaboration with Óptima Mayores of Spain in 2018, to fund reverse mortgages on the Spanish market. What is your assessment of opportunities for further cross-border funding on the continent?
I believe there is an opportunity for financial institutions to really play a role in the European market. However, historically they have limited themselves to the local market which is the one they are more comfortable with. Now with the digital instruments and with an established network of brokers and servicers, I believe banks and other investors can really create a pan-European origination platform which will allow scale and will diversify their risk geographically.
What can be done to stimulate the market in cross-border funding? Do we need greater harmonisation of the regulatory frameworks in Europe?
To stimulate the cross border market one has to have support from regulators and have an harmonised legal framework. It should be no different from the way consumer protection works in each country and the way capital requirements are set by the different regulators. Only then we can really create a true and borderless pan-European market.
To what extent can governments in Europe use equity release as a partial solution to the ‘pensions gap’, at a time where governments are becoming increasingly indebted in the light of the COVID-19 pandemic?
This particularly difficult economic environment should be used as a catalyst to introduce the equity release product as a way to unlock wealth from a number of families in need as they are usually cash poor and asset rich. There have recently been initiatives from national governments such as Malta, Colombia and Chile to sponsor this product and make it available to the population. I believe a combination of a government programs with no negative equity guarantees and a privately led program would allow a larger audience to have access to this product.
What do you believe will be the long term impact of the COVID-19 pandemic on the demand for equity release in Europe? How can adequate supply be secured on the funding side?
I believe there will be more need from families for such a product due to high unemployment rates and families trying to support their children. A number of senior citizens also had complementary income that may disappear and will require support. I think regulators should incentivise banks to provide this type of loans by reducing the capital requirements the same way they did with SME lending. Apart from pension funds and Insurance companies, I also believe state social security funds with their large pools of capital could be used to buy portfolios of lifetime mortgages.
What would be your message to potential funders, outside Europe, who may be looking at opportunities in the European equity release market?
My message is very simple and clear; Lifetime Mortgages are a great product, particularly in this low interest rate environment. It is a product that combines low levels of risk with high returns when compared with traditional mortgages. Moreover, this product will provide additional diversification to investors and has a very important social impact component.
The European Pensions and Property Asset Release Group (EPPARG) has today announced the launch of high level standards to promote growth of the home equity release market in Europe.
EPPARG has developed the standards, which are known as the ‘EPPARG 10’, through discussions with its members and associates which make up more than 75% of the home equity release market in Europe. The standards aim to build confidence in equity release solutions among both potential funders and customers, with a view to growing the European market, given that the product is still at a nascent stage in a number of European countries and non-existent in others.
The standards highlight that equity release mortgage products shall be lifetime products which enable customers to live in their main homes for their whole life, and set out the key terms and conditions regarding the provision of the product, which deal with repayment terms, the freedom of customers to transfer the loan to another suitable property, early redemption rights and interest rate options, among others.
In addition, the standards set out a number of conditions on consumer protection, to ensure that all information is provided to customers by competent, knowledgeable and duly authorised persons, and that a checklist must be signed by both the customer and provider before a contract for an equity release product is signed, among others.
Commenting on the standards, Steve Kyle, Secretary General of EPPARG, said:
“The home equity release market has been continuing to grow safely in Europe, and in recent months market players have been adapting to the ‘new normal’ in the light of COVID-19. Through the launch of our EPPARG 10 standards, we aim to contribute to the further development of a safe market across Europe, to the benefit of elderly homeowners.”
“There are clearly common demographic challenges across European countries, and we consider that home equity release can provide a partial solution to the ‘pensions gap’. Home equity release provides considerable social and economic benefits to consumers, and the new standards will help ensure that equity release is a safe financial option for elderly homeowners seeking to supplement their income.”
Lennart Grabe, Deputy Secretary General of EPPARG, said:
“There is great potential to build the home equity release market in Europe as a time where the continent’s population is ageing and national pension systems are under pressure. In countries where the product has become established, such as Sweden, we are already seeing that it can make a huge difference to the quality of life of elderly people, by supplementing the incomes of those who are asset-rich but cash-poor. There are significant opportunities for new funders and investors to enter the European market given that home equity release providers on the continent are under-funded at present.”
“We hope that the EPPARG standards will encourage the investor community to engage with companies in the sector and foster the development of cross border businesses within Europe and, why not, the world, based on similar sound basic product conditions and proper market behaviour”.
EPPARG, the European Pensions and Property Asset Release Group, has responded to the Consultation Paper on the 2020 Review of Solvency II launched by EIOPA, the European Insurance and Occupational Pensions Authority. Solvency II provides the framework for insurance regulation in Europe.
In its response, EPPARG highlighted concerns that the proposals made by EIOPA in respect of the Solvency II matching adjustment could stifle the growth of the equity release market in Europe.
Specifically, EPPARG considers that the provisions which deal with the matching adjustment would benefit from further clarification to provide that, in line with the definition of the fundamental spread, the allowance for financial guarantees in the matching adjustment should be based on the long term expected impact of the guarantee to a hold to maturity investor.
If this clarification is not made, in EPPARG’s view, the matching adjustment available on restructured lifetime mortgages may need to be adjusted to reflect the theoretical fair valuation of the no-negative-equity-guarantee (“NNEG”). Whilst including an allowance for the NNEG based on its theoretical fair valuation may be appropriate when deriving the fair value of lifetime mortgages, EPPARG does not believe that it is an appropriate measure to test the level of matching adjustment available on restructured lifetime mortgages.
EPPARG will continue to follow the Solvency II Review and to engage with EIOPA as appropriate as the process continues over the coming months.