STATESIDE: Anbang, crash, wallop

Last month, two newcomers burst onto the US private equity real estate scene. While both were sizable transactions, what made the deals particularly noteworthy were the buyers: both were foreign insurance companies, and both were virtual unknowns in the industry.

In one of the most talked-about deals of the year, Hilton Worldwide Holdings announced on October 6 that it had agreed to sell the Waldorf Astoria New York, the storied New York City luxury hotel, to Beijing-based Anbang Insurance Group. Unsurprisingly, the transaction generated a lot of chatter for its hefty $1.95 billion price tag, as well as the fact that involved a world-famous hotel property. But what really got people talking was that virtually no one in the industry had ever heard of Anbang before.

Another insurer that seemingly came out of nowhere was Zug, Switzerland’s Allied World Assurance Company Holdings, which made its first foray into real estate through an entity-level investment in Blue Vista Capital Management, a Chicago-based private equity real estate firm. Just a day after the Waldorf deal was made public, Allied World announced that it had acquired a minority stake and certain shareholder rights in Blue Vista, and agreed to provide growth capital to the firm. In exchange, Blue Vista would manage $225 million of Allied World’s capital, to be deployed in real estate investments over the next several years.

This is just the start of things to come. Just a week before the two transactions were announced, BlackRock released a paper that highlighted global insurers’ increasing interest in private assets, particularly real estate and infrastructure, as yields in fixed-income assets have dwindled. In the next three years, 46 percent of insurers anticipated allocating more than 15 percent of their portfolios to private assets, compared with just six percent three years ago. For many of these companies, private assets are seen as a way to replace or enhance investment income and achieve diversification targets, the report said.

While many insurers in the US and Europe have been in investing in international real estate for decades, a sizable portion of the global insurance industry is just starting to make cross-border property investments. For example, recent regulatory changes in emerging economies such as China and Taiwan have allowed insurance companies in those markets to begin investing outside of their borders.

“You’re getting a lot more markets that are institutionalizing and opening up for the first time,” said Simon Treacy, chief investment officer and head of US equity at BlackRock Real Estate, in an interview with PERE. “That’s probably the new part of the market globally that wasn’t there three years ago.”

But talk about bad timing. Top global property markets such as the US are already flooded with institutional capital – and these investors already are having trouble getting money out, given the enormous amount of capital chasing a limited supply of opportunities. And if the competition weren’t fierce enough, the frenzy is sure to escalate as these new players join the fray. Additionally, insurers face their own particular set of challenges in increasing their real estate allocations, particularly from a regulatory perspective.

At least these insurers seem to be prepared to wait. “The insurance companies are being very measured in how they look at the markets so that they’re not all coming in at a time when there’s already a lot of capital in the system,” said Treacy.

Unlike some endowments or sovereign wealth funds, which can make investment decisions relatively quickly, global insurers typically are complex entities that require buy-in from multiple divisions. Therefore, the timeframe for insurers to plan an investment strategy and then actually begin deploying capital often is much longer than other institutional investors. “It’s the beginning of a 30-year, 40-year strategy,” noted Treacy.

With a decades-long investment horizon, global insurers that are seeking to raise their property allocations aren’t likely to collectively make a huge splash, but the impact will be felt nonetheless. As challenging as it currently may be for insurers to put out capital, new players such as Anbang and Allied have managed to strike significant deals. We’d be willing to bet that many more insurers are due to make surprise real estate debuts in the coming years. Prepare for the unexpected.