Investors from China may be set to unleash a flood of capital on the global real estate industry.
New regulations put in place in 2012 by the China Insurance Regulatory Commission (CIRC) have widened overseas investment options for Chinese insurers, which have an expected $14 billion available for overseas commercial real estate investments, according to Chinese Insurance Funds Target Overseas Real Estate, a recent report by CBRE.
According to the report, the new regulations allow Chinese insurers to invest 15 percent of their total assets in “non-self-use” real estate. With total assets of $1.2 trillion combined among Chinese national insurance institutions at the close of 2012, this allows for more than $180 billion to be invested in real estate. If these institutions follow asset allocation patterns seen among insurance funds within developed nations, they’ll allocate 6 percent of their total assets to direct property investment, with 20 percent of those investments being made overseas. This would lead to $14.4 billion in overseas commercial real estate investments.
Though the Chinese real estate market enjoyed particularly rapid growth and high levels of domestic investment for the first 10 years of the 21st century, large increases in the price of land and expanding demand for property and investment have led to rapidly escalating prices. In response, the Chinese government has launched a series of policies aimed at curbing domestic real estate speculation, especially in the residential sector, namely through administrative, loan, taxation and other restrictions. Consequently, many Chinese investors are facing limited domestic investment channels.
Additionally, while regulation has become more stringent at home, these investors are seeing the major overseas property markets experience a continued pick-up in investment momentum coupled with their high-yielding assets maintaining depressed values from the 2009 financial crisis. Add in the escalating purchasing power that the continued appreciation of the RMB has afforded Chinese investors, and it becomes clear that a large window is opening through which billions of dollars of Chinese capital will soon flow.
According to Marc Giuffrida, executive director, global capital markets, with CBRE:
“Chinese insurance institutions are already well established in domestic markets, but following a series of government policy changes, they will look to target overseas commercial real estate markets. The insurance industry, in particular, is thriving; buoyed by ever-increasing funds they will target gateway cities around the world such as London, New York, Toronto, Singapore, Hong Kong and Sydney in increasingly large amounts. The low liquidity, value-added potential and stable cash flow of prime office and retail assets offers a perfect match for these investors.
“Compared with developed countries, the allocation by Chinese insurance companies to overseas real estate investment is still relatively low, even with a modest increase in allocations given the capital base the flows could be quite substantial. Using the Malaysian and Korean outbound investing experience as a guide, big industry leaders will lead the way, but once they demonstrate success the rest of the industry to follow.”
But Chinese insurance companies will face a number of challenges as they enter the global real estate market, namely due to their inexperience. According to An Expanding Horizon — Chinese Capital Tapping into Overseas Real Estate Markets, a separate report released by CBRE this year, Chinese insurers will be confronted with a number of challenges when making overseas investments, including:
- How to make choices on different investment areas/destinations;
- How to close a deal as quickly as possible amid keen competition;
- How to determine the right investment horizon, optimize the transaction structure and identify the best financing arrangement to maximize the ROI; and
- How to manage and operate the acquired assets effectively.
Additionally, these investors could be facing a relatively long learning curve due to unfamiliarity with local laws, market rules and regulations. They will also have to adapt to domestic regulations on overseas investments that limit Chinese insurance companies to investing in mature retail and office properties located in central areas of major cities in 25 developed markets such as the United States, United Kingdom and Australia, as well as the listed REITs in these 25 markets.
In order to contend with these challenges, Chinese insurers may follow in the footsteps of some major real estate enterprises, such as Vanke and Wanda Group, which have chose to enter into partnerships with experienced foreign partners in order to make sound investments. But, while a desire to better understand foreign markets and regulations may have caused some Chinese insurance companies to be tentative with their overseas investments over the past year, it certainly hasn’t slowed the Ping An Insurance Group, which acquired the Lloyd’s Building in London for £260 million ($403 million) earlier this year.
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Reg Clodfelter is a reporter at Institutional Real Estate, Inc.
