Easing regulations drive overseas investment
On the back of record low yields in their domestic market and recent concerns over a slowing home economy, Taiwanese insurers are joining their Chinese peers in overseas property acquisitions with both Cathay Life and Fubon Life acquiring assets in the UK and continental Europe.
The move comes in the wake of changes to regulations in May 2013 which allowed insurers with a risk-based capital (RBC) ratio over 200% to invest up to 10% of their shareholders’ equity in offshore real estate. Further changes in August 2015 are expected to increase their investment capacity.
As a result total real estate holdings more than doubled from USD15.4bn in 2011 to USD36.7bn by H1 2015, with real estate allocations rising from 3.6% to 5.8% of total assets under management, which is generally higher than other insurers in the region.
Expansion in investment capacity
The latest regulatory amendments imply an expansion in investment capacity by more than 1.6 times the existing amount (USD3.9bn). This is equivalent to adding a further USD6.3bn in potential capital. However, we expect that their injection into offshore real estate will be even higher since insurers can be granted special approvals to invest beyond the regulatory limit. Thus investment in excess of USD10bn over the next couple of years would not be unexpected.
Although having the potential to be significant global investors, the growth potential compared to their Chinese counterparts is lower. This reflects the smaller size of the Taiwanese market and its relative maturity with a greater market penetration (close to 19% of GDP) and higher premiums per capita which closely match developed Western economies.
Leading gateway cities for initial venture
Like their peers, Taiwanese insurers will primarily target leading gateway cities with higher transparency and liquidity for their initial wave of overseas investment. So far over 90% of their offshore real estate holdings are concentrated in London. Other leading cities could include Frankfurt, Paris, Shanghai and Toronto, which offer access to suitable products (USD100m+). Although New York is also on the recommendation list, local regulation in the United States prohibits financial holding companies from acquiring assets other than for self-use purposes. This will place Taiwanese insurers at a disadvantage, unless they can find a solution to bypass this restriction. Markets such as Sydney and Tokyo in Asia where yields remain favourable compared to their home markets will be targets as well. In EMEA Fubon has successfully invested in Benelux so we can expect a broader push across Europe where core income returns are attractively priced.
Diversification into non-core assets … but not development
Stable income-generating asset types such as office, industrial, retail and hotels will be their main focus to match their long-term liability. Although their yield hurdle has been reduced, we do not expect them to pay top prices, this will prompt them to diversify into alternative property types and markets in the search for enhanced returns. However, Taiwanese insurers are less likely to follow their Chinese peers’ footsteps by expanding into development projects, since they are restricted by regulations to investing in real estate that generates profits at the time of investment.
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