A new Taiwan law will open the door to cash-rich insurance companies controlling $450 billion (approx. €347.8 billion) of capital to enter the overseas real estate investment market for the first time; however, strict controls will limit the flood of investment in the short-term, according to the latest research from CBRE.
Domestic insurance companies currently own approximately one third of the Grade A office market and are consistently the most active purchasers of commercial real estate in Taiwan. Taiwanese insurers’ real estate investment has grown at 13 per cent per annum in the past six years to a total of US$19.8 billion (approx. €15.3 billion), and since 2006 US$9 billion (approx. €6.96 billion) of real estate acquisitions were made; however, restrictions on investing overseas meant that all of these purchases were made onshore.
This is set to change with the announcement by the Taiwanese Insurance Bureau that overseas investments will be permitted, subject to certain criteria. As a result, domestic insurance firms will launch forays into the global investment market as insurers look to geographically diversify real estate portfolios and seek improved returns on investments.
Chris Ludeman, President - Global Capital Markets, CBRE, commented:
“This is a highly positive development that signals the opening of foreign investment opportunities for a group of Taiwanese investors controlling more than $450 billion of capital. The rule changes have been an open secret for some time and insurers in Taipei have expressed a keen interest in pursuing certain targets beyond national boundaries. The geographical location of Shanghai is appealing to insurers while the maturity, liquidity and availability of assets in London, Frankfurt, New York and Toronto should also draw investment activity.
“In recent years, cash-positive pension funds have been created by legislative changes in Asia and the demographic profile in emerging economies such as Malaysia, resulting in significant overseas investment. The number of SWFs and cash-positive pension funds not yet investing globally – or even in real estate – suggests that this sector of investment remains integral to the global property market in the immediate future.”
The new legislation will allow insurance companies with risk-based capital ratio (RBC) at or above 200% to invest in overseas property, with the amount they can spend abroad not permitted to exceed 10% of shareholders’ equity. This means that about US$2.6 billion of capital, or less than 0.6% of their investable fund, can be deployed overseas initially under the new regulation. Only a handful of insurers will have the financial capacity at this time to fulfill the requirements to acquire core assets abroad.
Under the new guidelines, insurers are likely to be required to invest in wholly-owned buildings rather than co-investing with more experienced partners, which is common among other Asian institutions for easier access to assets and, in the case of investments in the United States, tax-saving purposes. Furthermore, the target investment building has to be income-generating with occupancy exceeding 60% and held in 100% equity; thus not using any leveraging. This further reduces the lot size of assets that they can invest overseas.
Taiwanese insurers are also likely to face stiff competition in their target markets. While the pure equity nature of their investments may offer a certain advantage, further regulatory issues place them at a distinct disadvantage. All overseas investments realized by the insurers must first obtain approval from the Insurance Bureau on a case-by-case basis. Moreover, in the case of investment in mainland China, applications must be directed to Taiwan’s Ministry of Economic Affairs and a wholly-owned foreign enterprise (WOFE) for on-shore assets must be set up, which could take another few months to process.
Edward Farrelly, Head of Research, Hong Kong, Taiwan and Macau, CBRE, commented:
“Despite the restrictions, the opening of an avenue for foreign investment is a positive move. Not only will insurers have a broader and more diversified range for investments to choose from, and at more attractive yields, but pressure in the home market may also ease as demand may now be funneled elsewhere. Should these initial movements prove successful then we may of course see the regulatory body move again to encourage further overseas investment. As such, we may view the current measures as part of a process rather than isolated intervention.”