CIRC mulls Reit and PE property fund investments

China is about to approve real estate investment rules for insurers, with the authorities mindful that insurance capital should not be used to encourage speculative bubbles.

New draft real estate investment regulations are soon to be released by the China Insurance Regulatory Commission (CIRC). Investment managers for the country's Rmb3.8 trillion ($562.5 billion) in insurance capital will then officially dip their toes into the world of property investments for the first time in history.

Of course, many Chinese insurers already hold real estate projects that they invested in before the CIRC required them to clean up their books in 2003 -- and many of these assets are non-performing. In the past, insurers chasing yields from real estate assets have bypassed the restriction on property investments by cheeky accounting. They do this by building a property in a city like Beijing, Shanghai and Shenzhen and then listed the building on their books as property intended for "self-use". To qualify for that description, they keep one or two floors to house their various agency or internal offices, and make money by renting out the rest of the space to mostly commercial tenants.

The new rules will change all that.

Globally, insurers' average real estate allocation tends to hover around 1-2%, says Cao Deyun, director and senior economist at the rules and regulation division of the insurance fund management department at the CIRC. Asia tends to have a greater allocation to property investment; Japan, South Korea and Taiwan average around 6%, compared to France, which has the largest allocation in Europe, at 4%.

Speaking at a recent conference in Beijing, Cao said property investments offer insurers more capital-appreciation opportunities. The resulting allocation depends on the maturity and industry profile of the local market. He did not elaborate what this spells for the resulting investment caps for Chinese insurers.

While insurance companies are excited about finally being allowed into property investments, Cao stressed to the conference audience that "insurance capital should not be used to encourage speculative bubbles". The capital will most likely to be channelled into commercial properties, while investments in land development and residential projects look to be off-limits. 

Last year, the insurance industry's assets totalled Rmb3.8 trillion. Premium income reached about Rmb970 billion. So, depending on the CIRC's eventual cap on allocation -- even if it is just 1% of Rmb3.8 trillion -- the potential wave of insurance capital coming into the property market will be substantial. Cao says insurers will become a dominant force in China's real estate market in the years ahead.

For that very reason, the regulator intends insurers to take the professional route in managing property investments. (The CIRC is mindful of calls from the People's Bank of China to investigate irregularities dating back to the early 1990s on investments made by remote insurance subsidies from Hunan to Hainan.)

The commission is not against securitisation. It will allow insurers to invest in Reits, as they become available in China. And though it is still early days, the CIRC is also mulling the idea of allowing insurers to invest in private equity funds. Otherwise, a restriction would be seen as a contradiction to the CIRC's rules that allow insurers to take direct stakes in companies.

For now, foreign capital is setting the pace in private equity investment in China. But Cao sees private equity as another area where insurers see tremendous room for expansion and are likely to dominate in the future.

The CIRC is also considering opening up channels of investments through mezzanine investments -- and this may not be restricted only to property-related projects. After all, the regulator has also set rules whereby insurers can take direct stakes in private equity investments and take up privately placed debt issues. Mezzanine investments may just be a combination of both, and insurers are pushing the regulator to consider them.

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