ASIAVIEW: A big new route for China


Jonathan Brasse

Private equity real estate firms investing in China are riding quite the rollercoaster ride on the back of all the market-altering new policies coming from Beijing these days.

The raft of residential bubble-averting measures adopted earlier in the year may have rattled the cages of some businesses. But last month’s ruling by China’s insurance regulator, the China Insurance Regulatory Commission (CIRC), to allow Chinese insurance companies to invest up to 10 percent of their assets in real estate, has undoubtedly provided the Chinese real estate investor with numerous positives.

As could have been expected when the doors swing open to any huge wall of capital, predictions of how much will be committed to the asset class by the $670 billion Chinese insurance sector have been numerous and diverse. Indeed figures ranging from $15 billion up to $100 billion have reportedly already been earmarked for deployment from big guns such as China Life and Ping An.

One source PERE spoke to foresaw greater liquidity, professionalism, and better quality real estate coming to the market as the demand for institutional grade assets significantly increases. He also said it would lead to less speculative investing – a sure sign of a maturing market. “A lot of assets trade, then flip in China, but these guys are going to be long term owners and that’s a good thing for the market. Soon we’ll have a greater flexibility in terms of who we can sell to,” he remarked.

Eventually China’s insurance companies should become limited partners too. Of course to what extent depends on certain clarifications such as whether the ruling that only three percent of insurance firms’ assets may be invested in real estate-related

A lot of assets trade, then flip in China, but these guys are going to be long term owners and that’s a good thing for the market

financial products includes private equity real estate funds or not (straight private equity funds are identified separately and have been slapped with a four percent cap). Three percent still leaves a sizeable kitty for fund managers to fish from and when you consider China’s insurance sector is slated to grow up to 30 percent by 2013, in absolute terms, such fundraising potential is extremely palatable.

Funds to benefit will need to be RMB-denominated but while private equity real estate platforms are significantly behind their private equity cousins in launching such products, they surely soon will catch up and the CIRC rulings of last month should generate further impetus to that.

But first and foremost, the introduction of insurance company capital in China offers a sustainable exit channel for private equity real estate firms for when they have performed their magic, just as they do elsewhere in the world.

Certain firms with existing China strategies should consider themselves a little more fortunate than others

Certain firms with existing China strategies should consider themselves a little more fortunate than others. The CIRC rules that insurers cannot invest in residential assets, perhaps as part of wider market-cooling state prerogatives. This leaves commercial real estate. Those with retail strategies should feel they can still offer insurers real estate directly associated with China’s rising consumer base now that housing is off the table. China Resources majority-owned firm Harvest Capital is one firm in such a position after launching two vehicles aimed at increasing its exposure to retail at the turn of the year.

Meanwhile another firm, CITIC Capital, last month signalled its intention to prioritise retail investing over residential as it purchased its first shopping centre project in Changsha, Hunan Province. For firms such as these the road ahead is unquestionably looking straighter.

Others such as AXA REIM may still need to sweat as they await for CIRC’s small print. In July last year, the French platform’s Asia business struck a joint venture with Ping An to raise a China residential fund. One source familiar with the platform confided the firm is already evaluating alternative ways of maintaining the insurer’s capital involvement: “Chinese insurance money is banned from directly investing in residential development projects,” he said. “However it’s possible that insurance money will be allowed to invest into [their] fund. This may not affect [AXA REIM’s] co-investment with Ping An as they have other sources of capital such as their discretionary commingled trusts and their shareholder fund.”

It would be too simplistic to infer that all firms with a retail strategy are among those best placed to benefit from the CIRC rulings. As one chief executive officer told me earlier this year: “Shopping malls are the most difficult assets to manage. You can lower your prices [to retailers] by 10 percent and see additional demand for your asset. Lower by 20 percent and the [tenants]

It would be too simplistic to infer that all firms with a retail strategy are among those best placed to benefit from the CIRC rulings

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disappear overnight. I’ve seen shopping malls empty for more than 10 years. When they are dead, they are dead.” Retailers can be a fickle commodity and in countries like China, the global brands often test a market on short leases before committing longer term. Insurance companies are characteristically cautious with their capital and will seek managers with proven judgement before they offer them an exit.

But given the potential rewards many firms will make it their business to ensure their assets reach the standards institutional capital demands. For those that do, the rollercoaster ride will be far more enjoyable.