Spurred by relaxed regulations, rapid industry growth and the continuing search for yield, Asian insurers are forecast to boost investment in real estate to $205 billion by 2018 from $130 billion last year.
Some $30 billion of that increase could be into overseas real estate, said property services firm CBRE in a recent report.
Their exposure is currently relatively low. Asian insurers’ allocation to real estate including direct and indirect exposure was 2% as of 2013, compared with the UK’s 5% and the US’s 6%, the report said. Asian insurers had assets of some $6.7 trillion as of the end of 2013. That compares with UK insurers’ $3.0 trillion and US insurers’ $5.8 trillion, as of 2012.
Country allocations to property overall are 1% in China, 1.8% in Japan and 2.4% in Korea, the report said, and much of that is in domestic assets. Taiwan leads the pack with average allocation of 4.8%, though that is made up entirely of domestic property (see figure below).
A lack of investment-grade assets at home will likely prompt more Asian insurers to look overseas, CBRE said. Moreover, insurance penetration is expected to increase significantly, which could further whet insurers’ appetite for foreign property, the report said.
Between 2008 and 2013, insurance assets in South Korea and Taiwan expanded by more than 10% per year, while China posted growth of over 20%. Insurance premium growth in the region is driven by emerging markets, especially China, where premiums rose 65% between 2008 and 2013.
However, Asian insurers lack overseas experience and execution capabilities, face competition from other insurers, and are still subject to regulatory impediments. They also face the challenge of currency hedging and matching foreign assets to domestic liabilities when they invest offshore.
Last year Asian insurance companies invested some $4 billion in direct commercial real estate in their own region, double the figure in 2008, and they pumped some $2.4 billion into ex-Asia direct property assets last year.
They were most active in London, New York and Sydney, with Taiwanese firms in particular focused on Shanghai, the report noted.
In June last year, Kyobo Life Insurance and several other South Korean institutions bought the Galileo Tower in Frankfurt for $340 million. Now they are looking further afield to Chicago, Washington, DC, Paris and Frankfurt, CBRE noted.
Insurers in China have increased their property investment most of all in Asia, quadrupling it to $1.9 billion from $468 million in 2008, the report said.
Authorities across the region are becoming increasingly aware that insurers need to diversify their portfolios by asset type and geographically.
In October 2012, the China Insurance Regulatory Commission relaxed restrictions on domestic insurers investing overseas. It extended allowable investments to 45 countries – 20 of them in Asia – and expanded the permitted investable asset classes from equities and bonds to infrastructure projects and real estate.
Ping An Insurance led the way when it became the first Chinese insurance firm to buy an overseas real estate asset in 2013 with its acquisition of Lloyd’s building in London for $421 million.
Meanwhile, Korea’s government last October proposed abolishing the approval process for insurers investing in property abroad.
While Chinese and Taiwanese insurers prefer direct investment and full ownership, Korean insurers have participated in co-investment or club deals. In the first quarter of 2013, Hanwha Life Insurance teamed up with China’s State Administration of Foreign Exchange and Axa Real Estate to buy Ropemaker Place in London for $716 million.
Taiwan’s regulator allowed domestic insurers to venture abroad from May last year. However, they are restricted to overseas investments that comprise no more than 10% of shareholder equity and are not permitted to borrow from external lenders to finance such investments.
While there are few restrictions on Japanese insurers investing in foreign real estate, many firms were burned in the 1980s when they aggressively sought overseas exposure. That may have prompted many to turn to private Reits, the report suggested.