Chinese Insurers Allowed to Invest in Commercial Real Estate

Chinese insurance companies will be allowed to invest directly in commercial real estate for the first time under new regulations that are set to trigger a huge influx of cash into the country’s high-end property market. New regulations allowing insurers to invest in real estate go into effect on Thursday, although details on investment limits and what types of property insurers can buy will not be released for another month at least, according to regulatory officials. Conservative estimates put the amount of potential new investment by Chinese insurers in commercial real estate at $34bn (€23bn, £21bn), according to Jones Lang Lasalle, the real estate consultancy. Based on current average capital values, $34bn is equal to more than twice the value of the Shanghai Grade A office market. China’s high-end, investment-grade market has seen average investment of just $8.5bn in each of the last two full years, and has been falling since the end of last year as a result of the financial crisis. The new regulations were “a key step in a process that has already seen a marked shift from a foreign-dominated real estate investment market to one where domestic players have assumed pre-eminence”, said David Hand, head of investments for Jones Lang Lasalle China. China’s insurers had combined assets of $540bn at the end of August and given the suitability of real estate as an investment to match long-term insurance liabilities, analysts say they are likely to invest as much as they are allowed. Considering the Chinese government’s record on liberalising insurers’ investment scope in the past it is likely the insurance regulator will move slowly and allow insurers to invest only about 5-8 per cent of their assets in real estate at the initial stage. Chinese insurers are currently allowed to invest up to 10 per cent of their total assets directly in equities and another 10 per cent in equity investment funds. Before 2006 they were not allowed to invest directly in equities at all. The expected influx of insurance investment to China’s commercial real estate will provide a huge boost in leading markets such as Beijing, where one-third of the office space is empty, prices are falling and total floor space is expected to double between 2007 and 2011. It also comes at a time when foreign interest in the Chinese market has dried up as a result of the financial crisis and the bursting of property bubbles across the world. Most Chinese insurers are directly owned by the state and some, including the People’s Insurance Company of China, have said they intend to invest in low-income housing when the new rules come into effect. The largest insurance companies have been positioning themselves for at least three years in anticipation of eventually being allowed to invest in real estate. Most have bought large office buildings in the centre of big Chinese cities that are ostensibly for their own use but in reality far exceed their own corporate office space requirements.