Acquiring Wanda, increasing investment in REITs, are insurance funds optimistic about real estate again?

Once dominating the real estate sector, insurance capital is making a comeback.

By the end of 2024, Xinhua Insurance, through the Kunhua (Tianjin) Equity Investment Partnership (Limited Partnership) established at the beginning of the year (hereinafter referred to as the "Kunhua Fund"), secured its seventh Wanda Plaza;

At the same time, the logistics infrastructure fund under Dinghui Investment, with China Post Life Insurance, Zhongyi Life Insurance, and other insurance capital as limited partners, completed a 5 billion yuan investment in logistics parks as the underlying assets.

The CRIC Research Center pointed out that the "ups and downs" between insurance capital and real estate has a history of 20 years.

For example, in 2015, small and medium-sized insurance companies such as Qianhai and Anbang used universal insurance funds to concentrate their holdings, triggering the "Baowan Battle" and acting as "barbarians at the gate";

After the decline of real estate stocks in 2021, insurance companies such as Taikang, Dajia, and Huaxia successively sold stocks, reducing their holdings in Vanke, China Merchants Shekou, Overseas Chinese Town, and Poly.

In the latest round of interactions, several insurance companies have increased their allocation to REITs and high-quality properties, with the Wanda assets they have taken over reaching 16.

Many industry insiders pointed out that against the backdrop of reduced safety margins in bonds and an asset shortage, insurance capital's increased investment in real estate aims to enhance returns; the differentiation in the types of real estate allocated reflects different judgments on the economic cycle.

"Both are real estate, but the investment logic of commercial real estate and infrastructure is clearly differentiated," said a practitioner from an insurance investment institution, Yu Ming (pseudonym).

Yu Ming stated that commercial real estate is closely related to the economic cycle, while infrastructure is less affected by the broader environment and can provide stable cash flow.

"The targets can indirectly reflect insurance capital's expectations for the economy," Yu Ming said. "For example, 'bottom-fishing' office buildings is based on the logic that asset prices have hit the bottom and future safety margins are high; buying water conservancy and highways may reflect opposite expectations."

Is Prosperity Reappearing?

According to the CRIC Research Center's summary, there are four common ways for insurance capital to cooperate with real estate in a normalized manner.

First, through secondary market equity investments, such as Poly Development, Vanke Real Estate, China Merchants Shekou, and Country Garden, where insurance capital is often present;

Second, bypassing regulations to cooperate with real estate companies in developing medical and health, elderly care services, and commercial office operations on construction land, acting as "investors";

Third, investing in public REITs through strategic placements, offline placements, and secondary market investments in public REITs;

Fourth, acquiring commercial office, industrial parks, and warehousing logistics projects to obtain rental returns.

Since 2023, the dynamics of insurance capital investing in real estate have been frequent, with mainstream methods shifting from the first two categories to REITs and physical assets.

On one hand, there is a continuous increase in investment in public REITs.

In September 2023, the Financial Regulatory Bureau, in the "Notice on Optimizing the Regulatory Standards for Insurance Companies' Solvency" (hereinafter referred to as the "Notice"), adjusted the non-transparent risk factor for insurance companies investing in public REITs from 0.6 to 0.5, reducing capital occupation and further opening up market entry space.

Subsequently, various REITs frequently saw the presence of insurance capital behind them.

For example, in November, the China Merchants Highway REIT was listed, with China Life, Ping An, PICC, and Zijin Property Insurance as strategic investors, and the combined share of insurance capital's strategic placements and offline placements accounted for 14.74% of the total In the same month, the YinHua ShaoXing Raw Water Irrigation REIT was listed, attracting 84 investors from insurance companies and their product accounts.

On the other hand, there have been frequent acquisitions of held real estate.

For example, at the beginning of 2024, Xinhua and CICC Capital Operations jointly established a 10 billion scale Kunhua Fund to directly or indirectly invest in held real estate project assets.

By the end of the same year, the Kunhua Fund had obtained controlling rights in Wanda projects in seven locations: Beijing, Yantai, Nanjing, Chengdu, Chifeng, Jinjiang, and Yinchuan.

In addition to Xinhua, five other insurance companies, including Sunshine and Dajia, acquired 10 Wanda assets between 2023 and 2024;

AIA acquired controlling rights in the "CapitaLand Star Trade" project in Chaoyang District, Beijing for 2.4 billion yuan at the beginning of 2023;

Ping An invested in three logistics parks located in Heshan, Jiangmen, and Xi'an Airport in equity form;

China Life acquired a 49.985% stake in the second phase of the Beijing Yidi Port project from China Ocean Shipping Group for 3.1 billion yuan.

Additionally, companies such as Taikang Life, Jianxin Life, and HaiBao Life have also disclosed large real estate investment announcements, frequently increasing investments in office buildings, industrial parks, and senior living communities.

Direction Shift

Against the backdrop of declining bond rates and asset scarcity, insurance capital's increased investment in real estate aims to enhance returns.

According to data from China Central Depository & Clearing Co., as of December 30, the yield on 10-year government bonds was 1.71%, a decrease of 30.78 basis points month-on-month and 84.25 basis points year-on-year.

Several industry insiders have stated that the downward trend in interest rates has become long-term, especially with interest rate bonds being overdrawn this year, leaving limited space for next year, making the search for more alternative assets a common demand in the industry.

Under this logic, real estate has become one of the options for insurance capital.

For example, after about three and a half years of practice, REITs are gradually gaining market recognition as a special equity product.

Research data from CICC shows that about 50% of surveyed investors position public REITs as an independent major asset class, while three to four percent view them as alternatives to equity fixed income assets and dividend equity assets.

On one hand, REITs have low correlation with other major asset classes, which can diversify risks and optimize portfolios; on the other hand, their stable dividend advantage can also diversify risks and enhance the Sharpe ratio of investment portfolios.

Physical investment in real estate also has unique advantages.

Yu Ming pointed out that in accounting settlements, physical assets are valued at cost, which is more conducive to smoothing performance.

"Physical assets are only revalued once a year, and the value remains unchanged between two valuations, which can effectively smooth asset valuations," Yu Ming said. "If there are physical assets in the portfolio, performance may be relatively stable, and an increase in valuation at the end of the year can enhance the overall value of the assets."

The differentiation in specific asset choices reflects insurance capital's judgment on the economic cycle.

For example, the value of commercial real estate is mainly reflected during economic prosperity, as mall revenues significantly increase during prosperous times;

Infrastructure assets represented by communications and transportation are seen as a "safe haven" during downturns because they can generate stable cash flow regardless of economic conditions.

This logic may serve as a reference for different insurance companies' understanding of the cycle.

An insider from a leading insurance company revealed, "Our investments in real estate are more focused on infrastructure and warehousing logistics, with relatively little involvement in real estate." There are also insurance companies represented by Xinhua that have frequently "bottom-fished" in commercial real estate this year.

Yang Yucheng, the newly appointed chairman of Xinhua Insurance, stated at the mid-year shareholders' meeting regarding the frequent "bottom-fishing" in commercial real estate, "The company has never stepped on a landmine in real estate investment, and overall asset quality is relatively good."

"Asset Scarcity" Remains Severe

However, whether it is REITs or physical real estate, it seems insufficient to address the current "asset scarcity" faced by insurance capital.

A head of the asset allocation department at a leading insurance company revealed to Xinfeng that with the current decline in bond yields and asset scarcity, insurance capital is seeking alternatives.

"Especially for large-scale companies like us, it is very difficult to find," the person stated. "The overall scale of REITs is too small; we are buying vigorously, but it is still not enough."

The person mentioned, "The industry as a whole is also actively exploring innovative products, but the scale is still far from sufficient."

As of the end of November 2024, there are 51 publicly offered REITs products listed in China, with 4 products achieving expansion; the total issuance scale is approximately 150 billion yuan, of which the total expansion scale is about 5 billion yuan.

At the same time, the balance of funds utilized by insurance companies in China at the end of the third quarter was 32.15 trillion yuan, with life insurance companies reaching 28.94 trillion yuan.

The aforementioned person disclosed that the annual allocable fund scale for leading insurance companies often ranges from hundreds of billions to trillions. "The common feeling in the industry is that there are few targets and declining returns."

The dilemma of "a clever housewife cannot cook without rice" is even more severe for small and medium-sized companies.

Yu Ming admitted that the few well-known real estate investments in the market are more for large insurance companies to enhance their returns, which are "not replicable" for small and medium-sized insurance companies.

"Small and medium-sized companies face significantly more difficulties," Yu Ming stated. "However, most small and medium-sized insurance companies find it difficult to enter real estate investment."

After the "Notice" lowered the risk factors, the risk factor for REITs remains at 0.5, higher than the 0.3 and 0.4 for the CSI 300 and STAR Market; from the current asset categories, the vast majority of asset allocation is still in the public market.

"REITs are difficult to operate, have long cycles, and small scales; there are not many good targets in commercial real estate," Yu Ming stated. "Among small and medium-sized insurance companies, some do not have the qualifications for real estate investment, and some have poor operational capabilities, making it difficult to obtain good projects."

Looking to the future, Yu Ming expressed, "We still hope that regulators can further 'loosen' restrictions and that the industry can innovate more good targets."