COMMENT: A high hurdle

At MIPIM Asia this week, Ping An offered a glimpse of what China’s insurers might be seeking in their overseas investments.

By now, it is well known that Chinese investors are looking to place a portion of their vast capital in overseas property markets. So far, these investors have consisted primarily of developers and asset managers, but insurance companies and pension plan have been granted permission to invest abroad as well and have quite a bit of capacity to do so.

While much focus has been placed on the potential amount of capital that could be invested, fewer players have put much emphasis on what it will take to get one of these Chinese institutions to write a cheque for an overseas acquisition. However, at the MIPIM Asia conference in Hong Kong this week, Ping An – one of China’s largest insurance companies and a first-mover among its peers – offered a glimpse of what it is seeking from its overseas property investments.

Specifically, Ping An is seeking real estate assets that can deliver stronger returns than can be achieved from domestic bonds, which have delivered an average return of about 4 percent and as much as 4.8 percent last quarter. Because Chinese insurers regarded domestic bonds as essentially risk-free, it makes it harder for them to get comfortable with investments overseas unless they generate significantly higher returns. For example, Ping An’s first overseas real estate investment, the purchase of the Lloyd’s of London building in July, reflected a net initial yield of 6.1 percent.

Finding investments that meet or exceed that return hurdle is not a problem in and of itself. The trick is finding core assets located in gateway cities that achieve such returns – a rare find that becomes scarcer still as more capital piles into real estate. Indeed, this conundrum is the primary reasons why institutions in China are maintaining such a cautious, deliberate approach to investing.

According to Dealogic, some $1.4 billion has been invested by Chinese entities in acquisition deals in the US so far this year, making it the top real estate destination for Chinese capital. Such investors are attracted to the US in general because of the market’s economic recovery, its ample liquidity and the stability of returns, but some already are anticipating outlays beyond the relative safe confines of gateway markets in an effort to find value and meet return objectives. Last month, one Chinese developer purchased two abandoned building in the bankrupt city of Detroit – quite the stretch for most investors, let alone foreign institutions.

Although many Chinese institutions have high real estate allocations, they remain preoccupied with how to execute their strategy overseas. And while it is worth getting excited about the potential deployment of that capital, self-imposed hurdles mean it will be tougher for that capital to actually be put to work. Therefore, potential local partners and would-be sellers should expect it to take some time for Chinese capital to filter through into the world’s real estate markets.