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  • Oct 23, 2014
  • Updated: 2:17pm
PropertyHong Kong & China
CONCRETE ANALYSIS

Chinese insurers become key property investors

Since being freed to buy commercial real estate in 2009, the industry giants have become key market players, and their role is set to grow

PUBLISHED : Wednesday, 19 June, 2013, 12:00am
UPDATED : Wednesday, 19 June, 2013, 4:31am
 

The mainland's real estate market turned a new page in 2009 when the government allowed insurers to invest in immovable property. In the three years since they have become increasingly active in the market.

As authorities continue to ease regulations, the potential for asset-rich insurers to spur the market could be immense, and they may take market share from foreign real estate funds.

From October 1, 2009, subject to certain qualification requirements, insurance companies were free to invest up to 10 per cent of their rolling quarterly assets in commercial property. Last year the ceiling was raised to 15 per cent, and since domestic insurers held total assets of 7.36 trillion yuan (HK$9.27 billion), more than 1.1 trillion yuan was available for property investment.

Long-term investments providing stable income that conforms with the requirements of regulators and customers are preferred, which is why traditional investment choices - such as bank deposits and bonds - are popular among insurers.

Investors turn to alternative investments, such as real estate, for risk diversification and higher returns, and the complexity of valuing real estate investments means they have to be cautious in planning, evaluating, and analysing their portfolios. However, the potential returns could well compensate for the extra effort.

Currently, domestic insurers are allowed to acquire only commercial property. Nevertheless, with its long duration, stable rental income, and comparatively lower risk, this is seen to be a legitimate choice.

In addition, the buoyant market in recent years has whetted the investment appetite of insurers. This might explain why, way before the regulations were eased, domestic insurers were already market players.

Prior to 2009, insurers disguised their real estate investments as being for self-use, while leasing out most of the space they bought for rental income, and occupying only a small part of the premises. The practice suited their long-term investment strategy, which was to buy and hold.

Examples include China Life Insurance, which bought the China Life Insurance Centre in Beijing for 1.12 billion yuan in 2005. Then in 2006, Taikang Life Insurance and Minsheng Insurance together bought three office towers in the capital.

Insurers also set up real estate trusts to generate premium returns from property investments. Through joint ventures with developers, they provided financing for their "partnerships" in real estate and in return received a guaranteed or preferred return. The insurers then securitised the low-risk, high-return investments into trust units, sold them to individuals and institutions, and profited from the spread. This kind of investment is still common, and is particularly popular when bank loan availability is low.

In 2011, China Pacific Insurance, Taikang Life Insurance, and New China Life together invested more than 10 billion yuan on grade-A offices in Shanghai. Last year, China Life bought an office block in the Lujiazui area, while the People's Insurance Company of China (PICC) acquired the Greentown Bund No.8 located in the Bund area.

Just like other investors, insurers are also stepping into tier-two cities. Since these cities generally involve lower initial investment costs and longer pay-back periods with stable returns, they are potentially a perfect match with insurers. One of the most active has been Ping An, which acquired three office towers from Shui On Group in Wuhan, Chengdu, and Shenyang.

Since last year, insurers have also been free to invest in major cities in 25 foreign countries including the United States, Britain and Japan. Ping An has made the first move, acquiring the Lloyd's building in London for 2.4 billion yuan last month, and a continued push into similar mature markets is expected.

If insurers appear to be fierce upstarts in the market, there is a reason. There are three major forces at work in the mainland real-estate market: foreign real-estate funds, yuan funds, and domestic insurance companies.

Foreign real-estate funds such as Carlyle and Blackstone, remain active and enthusiastic players and are positive about the future of the market.

They face some major obstacles, including heavy taxation, high barriers to entry and exit, and capital repatriation, but they can be expected to keep on raising money to invest in China.

Then there are yuan funds, which are becoming increasingly active. They raise funds onshore, and their greatest strength is that they are able to conclude deals quickly. However, their limited fund-raising capability and short investment horizons may curb investment choices.

Finally, there are the insurers - a rising force in the market, but one that still needs some time to develop. Currently, only the big names are busy in the market, but once the smaller insurers have overcome hindrances, including small asset size, immature asset management teams, and inexperienced acquisition teams, they will be able to join the scene and increase the impact of the industry on the market.

Furthermore, the activities of domestic insurers are now highly concentrated in tier-one cities. Markets in these cities are mature and returns are therefore lower, which suggests they will surely look at tier-two cities for higher returns and then their investment portfolios will spread to the rest of the nation.

At this moment, the insurers are still looking for returns in real estate that are higher than those offered by their traditional investments. As they come to the realisation that a lower yield is more readily achievable and rational, they will truly become the new stars of the nation's real estate market.

Alvin Yip is managing director of the Investment Department, China at DTZ

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