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(Repeats Wednesday report)
* Zero rates squeeze insurers, pension funds
* Many turn to booming property
* Supervisors alert as experts warn of bubbles
By John O'Donnell and Carolyn Cohn
FRANKFURT/LONDON, March 2 (Reuters) - Traditionallyconservative European insurers and pension funds are turningincreasingly to risky property bets on everything from new homesin provincial Britain to car parks at Brussels airport, as theyfeel the pinch from rock-bottom interest rates.
While much is in the form of equity stakes, they are alsoproviding loans secured against property, moving into territorywhere banks have retreated since the global financial crisis.
"The banks have taken a couple of steps back and are notproviding the same amount of credit," said Johan Held of AFA, aSwedish insurer which has spent one in seven euros of a 20billion euro ($22 billion) fund on property. "Many of theinsurance companies are stepping in to fill the gap."
At the moment, property, at least in many northern Europeancities, offers far better returns than conventional investmentssuch as bonds, where yields have been dismal since central banksflooded the financial system with cheap money to revive theireconomies.
But industry supervisors are alert to the shift intoinvestments such as property, an asset at the heart of theglobal crisis when sub-prime mortgage debt helped to bring downthe likes of Lehman Brothers.
At a time when some people are warning of a property bubble, supervisors fear that insurers, with limited experience of realestate, could underestimate the risks. In the case of pensionfunds, any disastrous investments could ultimately hurt theelderly by losing money needed to fund their retirement income.
Held played down the risks. "Appreciating values are notgoing to continue forever," he said. "However, as long as thereis rental growth I do not worry too much about valuations,especially ... where interest rates remain at ... low levels."
These are nevertheless largely uncharted waters for insurersor pension funds, which typically concentrate on investing incompany stocks and government bonds.
In a recent report on financial stability, the EuropeanInsurance and Occupational Pensions Authority signalled it isclosely watching developments, noting "an increased riskappetite" since 2008 to preserve investment returns.
The report pointed to insurers turning to investments"previously dominated by the banking industry" - mortgages,infrastructure loans and mortgage backed securities.
LACK OF EXPERTISE
Moody's credit ratings agency has expressed its own doubtsover the shift towards assets that are hard to trade such asproperty.
"There is a general lack of expertise and a track record,"said Dominic Simpson, a Moody's analyst. "Experience shows thatwhen insurers start to invest in these more esoteric assetclasses, they are not always going to invest in the most secureassets."
European Central Bank data shows insurers and pension funds'loans in the 19-country euro zone rose around 12 percent between2011 and late 2015 to more than half a trillion euros.
Those based in Germany accounted for almost 300 billion inloans in 2014 and the Netherlands 120 billion, although thefigures gave no break down between property and other lending.
Property investments by insurers and pension funds also takea variety of other forms. These include buying commercial orresidential buildings, and taking stakes in developers orspecialist real estate investment funds.
One of Britain's biggest insurers, Legal & General, recentlyteamed up with a Dutch pension fund to invest $653 million inbuilding thousands of British homes for rent, beginning in thewestern city of Bristol.
While Spain suffered a property crash as early as 2007, someof the insurance and pension fund money is going into southernEurope - Italian insurer Generali owns buildings in placesincluding Barcelona. However, much of it has been invested incities to the north where values have soared in recent years.
In a recent study, Swiss bank UBS said house prices in theworld's leading financial centres were "fundamentallyunjustified", putting London at the top of its 'bubble index'.
The research suggested prices in the British capital orNorway could be overpriced by as much as 40 percent, whileFrankfurt and Amsterdam are also overvalued.
Insurers' exposure to property, not to speak of individualcities, remains small compared with the giant size of theirfunds, but the strong rises in home prices are making someexperts nervous.
Credit underpins property markets and banks, underregulatory pressure to build their capital cushion, are ofteneager to sell.
There are roughly 4.5 trillion euros of home loansoutstanding in Germany, Britain, France and the Netherlands.Dutch mortgage debt totals more than two thirds of the amount inits far bigger neighbour, Germany.
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COMMERCIAL UNCERTAINTY
The picture for commercial property is also uncertain. In2014, the ECB flagged a boom in prices for prime commercial realestate, urging banks, insurers and pension funds to be preparedfor a change of fortune.
Insurers and pension funds, with fixed commitments topolicyholders and the retired, however, cannot wait for interestrates on conventional investments to rise from zero.
"Low interest rates affect just about every part of theinsurance business, shrinking the returns on investment andrequiring insurers to set aside more capital," said MichaelHeise, chief economist of Allianz, an insurer and one of theglobe's biggest investors.
In an otherwise barren landscape, property offers temptingreturns that are five-fold that of government debt to investorssuch as Belgian insurer Ageas.
It invests around 7 percent of funds in property, includinga majority stake in Interparking, which runs car parks includingthose at Brussels airport. "Real estate is important," said BartDe Smet, its chief executive. "It's one of the assets thatpermits us to achieve a higher yield."
A global slowdown, as the Chinese economy loses momentum,means that many central banks are unlikely to raise interestrates for some time. ECB President Mario Draghi has made clearthat avoiding deflation and getting euro zone inflation back upto its target takes priority.
"We have a mandate and our mandate is to reach pricestability," he told the European Parliament recently, "And thatcounts first and foremost."
"The economic situation will improve, interest rates willrise again and both the insurance companies ... and the saverswho suffer at the present time ... will actually be better off."
($1 = 0.9190 euros)
(Additional reporting by Francesco Canepa and Jonathan Gould inFrankfurt; editing by David Stamp)
