Real estate investing opening up for Asian insurers

The easing of regulatory restrictions on Asian insurance companies' investment in real estate is accelerating, with several countries in the region starting to allow overseas direct investments, higher allocation to real estate and a simplified approval process, according to CBRE, the world's largest commercial real estate services provider.

"Asian insurance companies have seen the positive results pension plans and sovereign funds have achieved from increasing their exposure to global real estate," said Marc Giuffrida, executive director in CBRE's global capital markets team. "Importantly there is now evidence and precedence in place that both regulators and investment committees can point to which may relieve concerns around the risk/return tradeoffs."

Industry statistics indicated that by the end of 2013, real estate made up on average 2 percent of Asian insurers' portfolios — US$130 billion, which includes both direct and indirect real estate investments. By comparison, developed markets typically allocate 4 percent to 6 percent of their assets to real estate, with the figure standing at 6.7 percent for the US and 5.1 percent for the UK. In Asia, Taiwan stands out as the one market that has relatively high real estate allocation of 4.8 percent.

The combined effect of an increase in Asian insurers' asset size, which grew 13 percent between 2008 and 2013, as well as increasing liberalization will result in Asian insurers' real estate investment assets growing from US$130 billion in 2013 to US$205 billion in 2018, CBRE has forecast. That should translate into additional inflows of about US$75 billion into real estate — including direct and indirect real estate investment, it says.

Compared to mature markets, there is a lack of investible assets in Asia, however. This, coupled with the recent rule relaxations, means there will be more Asian insurers tapping other regions. In 2013 alone, there were about US$2.4 billion of direct commercial real estate purchases by Asian insurers outside the Asia Pacific region. Typically, these insurers have a strong preference for trophy assets in gateway cities, particularly when they make their first overseas investments. The top cross-border destinations are London and New York, though it varies by country where their insurers are looking to invest.

Insurance companies from the Chinese mainland and Taiwan are likely to be more active in overseas real estate markets given lack of opportunities and low yield levels for prime core assets in their domestic markets, CBRE said. Direct real estate investment will be their preferred channel due to their preference for full ownership. Japanese insurance firms are expected to stay in the domestic market as they have been hurt by overly aggressive overseas investments in the 1990s. South Korean insurance companies have invested overseas over the past years and they have accumulated experience in overseas real estate markets. It is expected that Korean insurers may use more indirect channels to expand their global portfolios.

"Given the low yield levels and the shortage of investable stock, particularly stabilized income-producing assets in domestic markets, Asian insurance companies will have to explore opportunities in overseas markets," Giuffrida said. "The lack of overseas real estate investment experience and the need for regulatory approvals is likely to mean activity will be limited initially to larger insurance companies with strong financial capability securing assets in major global cities. However, as experience is built up, we expect the smaller players to emerge in cross-border acquisitions and explore indirect strategies."

Frank Chen, executive director and head of CBRE research, China, expects to see further relaxation on overseas real estate investment in Asia as regulators gain more confidence about overseeing such investments and insurance firms become savvier about investing globally.