Chinese insurance funds have more than US$14 billion available for overseas real estate investment, with high transparency markets, including the United Kingdom, United States, Canada, Singapore, Hong Kong and Australia, expected to be among the key targets, according to the latest research from CBRE Group, Inc.
Given the present scarcity of investable prime properties in first-tier Chinese cities and the short-term risk from the oversupply in second- and third-tier Chinese cities, prime high-end office properties in core international cities are expected to be highly sought after, especially considering the attractive yields they can produce in today’s low interest rate environment.
Chinese institutional investors are still relative newcomers to cross-border real estate investment strategies, compared to pension funds, insurance funds and sovereign wealth funds from other regions.
However, in recent years Chinese institutional investors have started to increase their investment in overseas real estate markets; a trend that has been driven by several factors, including limited investment channels in China, abundant liquidity, local currency (RMB) appreciation, and the relatively lower valuation of overseas assets in the years following the 2008 financial crisis.
In 2012, the total assets of China’s national insurance institutions stood at US$1.2 trillion. New regulations permit these institutions to invest up to 15% of their assets in “non-self-use” real estate.
By this measure, there is in excess of $180 billion currently available for real estate investment. Based on patterns of insurance fund allocations witnessed in developed countries in recent years (with most insurance funds typically allocating up to 6% of their assets to direct property investment) and assuming an 80:20 split between domestic and overseas market, it is estimated that Chinese insurers could invest up to US$14.4 billion in overseas real estate.
Although the number of investable properties in developing regions has increased sharply in recent years, those of high enough quality are still limited in Asia Pacific when compared with North America and Europe.
For this reason, Chinese institutional investors are expected to focus on premier office investment opportunities in gateway cities, which are capable of generating stable ROI in the short term, such as the premier offices in international gateway cities.
Markets marked by high transparency, including the UK, US, Canada, and Australia, as well as Asian markets that are adjacent to the Chinese mainland with similar cultural backgrounds, such as Hong Kong, Singapore, Malaysia and Thailand, will likely be the major destinations for Chinese real estate investors in the future.
Marc Giuffrida, Executive Director, Global Capital Markets, CBRE, commented: “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.”
Real estate investing is relatively new for these investors, with Chinese insurance funds only permitted to invest in real estate beginning in 2009 when changes to government policy were made.
Further regulation changes now permit insurance companies to invest a maximum of 15% of their total assets as of the end of the last quarter in ‘non-self-use’ real estate.