Chinese life insurers have made their early steps into overseas real estate largely through direct deals – but their strategy is likely to change due to rising competition for prime foreign property and a need to diversify exposure, says Jones Lang LaSalle (JLL).
It is getting more challenging for mainland insurers to buy real estate assets on an individual basis, said Alistair Meadows, Asia-Pacific head of the international capital group at JLL. As a result, he argued, they will move to invest in private real estate funds over the next three to five years and potentially also debt and private equity funds, and will increasingly form joint-venture partnerships to gain exposure.
David Green-Morgan, global research director at JLL, said Chinese insurers have only made “baby steps” into overseas property so far, but are likely to follow foreign peers that have increased their global alternatives exposure significantly in the past 20 years.
The world’s top 100 institutional investors on allocate 25% of their portfolios to alternatives as of this year, up from 5% in 1995, according to investment consultancy Towers Watson. Of that alternatives allocation, direct real estate funds account for 32%.
Chinese insurers can invest up to 30% of their total AUM in infrastructure or real estate. There is a 15% overall portfolio limit on foreign assets, but their allocations remain well below that level. Even the most aggressive, Ping An Life, has allocated 7% of its $118 billion assets to real estate, while China Life, China Pacific Insurance and Taikang Life each has 1% of their total assets in property, estimates JLL.
However, once mainland insurers significantly increase their offshore exposure, they will be a key source of capital for global property markets. Even just a 5% allocation of their combined $1.6 trillion in AUM represents $80 billion.
Chinese insurers have already teamed up to make direct bids for foreign real estate. China Life, the biggest mainland life company with $331 billion in AUM, partnered Qatar Holding, part of Qatar Investment Authority, to buy 10 Upper Bank Street in London in June last year. It also allied with the mainland’s second largest player, Ping An Life, to invest in Tishman Speyer’s Pier 4 Boston Waterfront Project in April this year.
Moreover, Chinese life insurers have been setting up real estate teams in Hong Kong with a view to building expertise in international markets, said Meadows, without giving any examples.
Taiwanese insurers are also looking to increase their foreign property allocation, noted Green-Morgan. Taiwan is a small commercial real estate market, and domestic insurers already own many of the local investment-grade assets, he noted. In addition, yield on prime office assets in Taipei is around 2.8%, compared to the 4-4.5% available in London, for instance, said Green-Morgan.
Cathay Life acquired London’s Walbrook building this May for £575 million ($900 million) in the city’s biggest single property deal this year, while Fubon Life paid £349 million in the same month for the site of Madam Tussaud’s waxworks museum, also in the UK capital.