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China Life can deploy as much as 1 trillion yuan in real estate. Photo: K Y Cheng

ExclusiveChina Life’s property investment arm among funds making hay as banks shy away from real estate

  • Commercial banks’ funding of the property sector has been clipped by Beijing’s debt-reduction campaign
  • Insurers might surpass banks as largest funding source for asset managers, says China Life Capital managing director Yang Yu

Chinese insurers are benefiting from Beijing’s deleveraging drive, as a scarcity of long-term funds helps them seal commercial property deals.

Chinese commercial banks’ funding of the property sector has been clipped by the central government’s debt-reduction campaign, which has given insurers an upper hand when it comes to premier assets.

China Life Capital Investment, the property investment arm of insurance giant China Life Insurance, is among the beneficiaries.

“In the old days, some commercial banks used short-term funds to invest in property projects that usually required five-year or more investment cycles. The new asset-management rules [since 2018] have banned such duration mismatches. That has left insurers, specifically life insurers, as literally the only funding source without such a mismatch,” Yang Yu, China Life Capital’s managing director, said in an interview. The company has more than 75 billion yuan (US$10.8 billion) in assets under management.

Before the rule change, banks channelled hundreds of billions of yuan raised from wealth-management products with a typical duration of three to 12 months to the property sector via asset-management schemes and trust firms. These massive inflows fuelled a buying spree by Chinese investors before 2017, which also saw foreign investors lose out against high bids. The new rules ban such practices, stemming the use of short-term funds for investment in property projects that usually require longer investment cycles, as well as asset-price bubbles.

“As China’s economy gets even more sophisticated, the life insurance sector will grow and yield more financial titans. Insurers might surpass banks as the largest funding source for asset managers, just like in developed markets,” Yang said.

According to official data, as of last year banks’ wealth-management products remain the largest source of funding for asset managers, with 29.8 trillion yuan against insurers’ 17.4 trillion yuan. The 7.4 trillion yuan in total assets of Ping An Insurance, the largest company in its industry, are dwarfed by the 29.2 trillion yuan in assets held by Industrial and Commercial Bank of China, the country’s largest bank as well as the largest bank in the world by total assets.

“The big insurers remain conservative when it comes to investing in real estate. If Ping An’s asset allocation in the sector could double, it would be tremendous. China also lacks long-term funding sources such as pension funds and university endowments,” said Stanley Ching, senior managing director at Citic Capital, a private equity fund.

Yang Yu, managing director of China Life Capital Investment, the real estate investment arm of insurance giant China Life Insurance. Photo: Handout

A scenario of more asset managers and projects competing for limited long-term funds puts funds such as China Life Capital in a sweet spot – Yang admitted this allowed the fund to take its time to select from a broader scope of projects. The situation also applies to foreign investors with access to offshore low-cost, longer term funds.

“Foreign investors always want to add to their position in China commercial property, but were outbid by cash flush local investors before,” Yang said. “What I want to emphasise is, while they are now on the back foot, local investors still account for more than half of the share.”

Yang said China Life Capital was sticking to its own investment pace. Of its assets under management, a third are pooled from third parties. In theory, China Life can deploy as much as 1 trillion yuan in real estate.

A majority of China Life’s money is ploughed into offices in core areas of China’s biggest cities, a relatively safe category with an internal return rate of more than 10 per cent. But it is also diversifying into a number of sectors with higher returns, such as logistics, development projects, use conversion projects and industrial estates.

In addition to funds co-launched with Singapore’s GIC and GLP, China Life is also in talks with some big foreign investors to co-invest in China’s commercial property sector, Yang said, without specifying.

It has, however, largely backed away from overseas markets and is investing domestically, in response to Beijing’s restrictions on outbound property investment.

This article appeared in the South China Morning Post print edition as: Insurers ‘have upper hand’ in property asset hunt