What happened to insurance funds investing in real estate?

March 30, 2012 | BY

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The amended PRC Insurance Law and the Real Estate Investment Measures were supposed to open up China's property market. Almost two years later, investments have yet to materialise

The amended PRC Insurance Law (中华人民共和国保险法) came into effect in October 2009, opening the door for Chinese insurance companies to invest in real estate. A year later, the China Insurance Regulatory Commission (CIRC) released Tentative Measures for Investment in Immovables with Insurance Proceeds (保险资金投资不动产暂行办法).

The new Measures represented the first official attempt by the CIRC to provide detailed guidelines as to the procedures and requirements for Chinese insurance companies to expand their investment avenues into real estate. They were designed to modernise China's insurance industry.

“What happened was the insurance companies quickly outgrew the regulatory framework guiding and managing the industry. As premium revenue collections grew, insurance companies needed new avenues to invest that were not expressly authorised under existing laws and regulations,” said Joel Rothstein, a partner at Paul Hastings specialising in Asia real estate. There was a lot of excitement at the time, but in practice, investments have been slow to materialise. “Considering the numbers of high profile projects and deals, there has not been a dramatic impact yet,” he added.

The government hoped the insurance reforms would make investments practical and in line with risk management. Before those reforms, insurance companies could only own property for self-use. In reality, the companies used one floor and rented out the rest of the building.

The government's policy on cooling the property market has caused regulators to keep a tight rein on insurance companies. “It is hard for insurance companies to roll out their investments on a large scale. Investing requires specialised expertise and above all the support of the insurance regulators. If it was easy to invest, much liquidity would quickly enter the market,” said Rothstein.

Foreign fund managers were not only disappointed with the lack of investments, but also insurance companies' lack of interest in forming joint ventures. Although the Law allowed new avenues for investment, domestic companies are still cautious as they build up their own in-house asset management and departments that focus on real estate investment.

Investors also hoped the reformed Law could ignite outbound investment in real estate. “Insurance companies ideally want income producing stabilised real estate in prime locations with a low risk profile when it comes to investments,” said Rothstein. It is difficult to find these properties in China, which left room for real estate investment in other countries. This also has not taken off, as the CSRC has yet to release rules or measures.

There still is hope. Infrastructure is still being developed in China at a rapid pace and when the market cools, insurance companies can move in. There is great potential for insurance funds in real estate but investors need to be patient. It is just not the right time, as investments would be inconsistent with the government's policy of cooling the market.

By David Tring

Further reading:

A hot year for real estate

PRC Insurance Law (中华人民共和国保险法)

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