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Since last year, there have been frequent reports of insurance funds investing in real estate projects, and this trend is continuing this year.

According to an incomplete review by a Securities Times reporter, since 2023, more than 10 insurance companies have invested in more than 20 real estate projects through direct equity investment, real estate funds, etc., with an estimated investment amount of more than 49 billion yuan. Among them, some investments are regarded by insurance funds as "bottom-fishing" opportunities, as self-use or holding investments; some are debt swaps, using real estate projects to resolve real estate debts and exchange time for space.

Industry insiders told the Securities Times reporter that in the current "asset shortage" environment, the value of high-quality real estate project allocation is gradually reflected. This year, it is obvious that more insurance funds are looking for investment opportunities in real estate projects, but at the same time, the expected return rate of related investments is declining.

More than 10 insurance companies

Investment exceeds 49 billion yuan

Last month, Dongguan Houjie Wanda Plaza Investment Co., Ltd. underwent a change in equity, with the original wholly-owned shareholder Dalian Wanda Commercial Management Group withdrawing and Suzhou Lianshang Liuhao Commercial Management Co., Ltd. taking over. Looking through the equity, it can be seen that Sunshine Life is the main investor.

This is the sixth Wanda Plaza project that Sunshine Life has taken over since the end of last year. Previously, Sunshine Life was behind the equity changes of five Wanda Plaza projects, including Taicang, Huzhou, Shanghai Jinshan, Guangzhou Luogang, and Hefei.

Since the second half of last year, several Wanda Plaza projects have been bought by insurance funds. In addition to Sunshine Life, other buyers include Xinhua Insurance, Dajia Life, Hengqin Life, etc.

According to incomplete statistics from Securities Times reporters, since 2023, more than 10 insurance companies have invested in at least 26 real estate projects, with an estimated investment amount of more than 49 billion yuan. From the perspective of the target, office buildings, commercial complexes, and industrial park real estate are all included. The insurance companies involved include both large insurance companies and small and medium-sized insurance companies.

In terms of large insurance companies, China Life Insurance spent 3.1 billion yuan last year and 3.9 billion yuan this year, respectively, to take over the equity of commercial real estate projects under Shimao and Sino-Ocean. Ping An Life Insurance announced in December 2023 that it plans to invest in four industrial park real estate projects, including Dongfang Wanguo, Hongyuan Science and Technology Innovation, Hongyuan International, and Hongyuan New Era projects. The total investment amount is expected to be no more than 7.333 billion yuan. The projects have been completed, obtained real estate certificates and put into use. Last year, China Post Insurance spent 4.256 billion yuan to purchase the COFCO Landmark Plaza project in Dongcheng District, Beijing. It has now been renamed China Post Insurance Jiuan Plaza. This year, it has invested in the TusPark project in Xi'an, Shaanxi.

Foreign giant AIA Life Insurance has also made moves in the past two years. At the beginning of last year, it acquired the landmark project of Shanghai North Bund Financial Center for 5.03 billion yuan. In January this year, it announced that it would acquire the controlling stake in the "CapitaLand Star Mall" project in Beijing's Chaoyang District (CBD) for a total consideration of 2.4 billion yuan.

Small and medium-sized insurance companies have also made multiple real estate investment moves. In December 2023, Haibao Life Insurance announced that the company invested in the 2nd to 11th floor real estate project of Building T4, Wuhan Guocai Center in the form of property rights. It is a non-self-use real estate project with a total transaction price of 203 million yuan. In February of this year, Dongwu Life Insurance announced that it plans to purchase a workplace and invest in Building No. 3, Block 3, Sudi 2017-WG-41, held by Suzhou Xin Gaorongjian Construction Development Co., Ltd. The total transaction price is approximately 414 million yuan. In April, Great Wall Life Insurance purchased Xinjie Gaohe, an office property located in the central area of ​​Beijing's Xinjiekou business district, for 1.02 billion yuan, including commercial and office buildings. In May, Zhongan Insurance announced the purchase of two "Rock Bund Source" projects in Huangpu District, Shanghai, as the company's self-use real estate, with a total transaction price of 1.437 billion yuan.

In addition, companies such as China Taiping Life Insurance, Taikang Life Insurance, CCB Life Insurance, and United Life Insurance are also investing in real estate projects that they have previously planned.

Carefully select high-quality projects

"Real estate investment has become a new alternative investment trend." A chief investment officer of a small and medium-sized life insurance company told a Securities Times reporter that one of the consensuses of insurance funds is well-allocated real estate projects because they have stable cash flow and are assets that can cross cycles.

A real estate investment expert from an insurance-related private equity management company told reporters that real estate assets have a low correlation with fixed-income products such as bonds that insurance companies have allocated a large amount of, which helps reduce the volatility of investment portfolio returns and improve risk-return characteristics. At the same time, real estate projects have relatively stable current returns that are not affected by interest rates during the holding period, and can also enjoy the added value brought by the increase in the value of core assets driven by the downward interest rate during the exit period, which can better match the liability characteristics of insurance funds.

Although there is a certain consensus among insurance funds on allocating real estate in terms of trend, from the perspective of investment preferences, insurance funds still maintain a low-risk preference and hope to carefully select high-quality projects.

A person in charge of an insurance asset management company told reporters that he had been looking for real estate investment opportunities in recent years. He also invested in individual real estate projects last year and this year. All of them were investments made by chance. The office buildings he invested in are "fully rented", and the rental prices and returns are in line with expectations.

He said that the real estate market is a non-standard market with asymmetric information and high professional requirements. When investing in real estate, many factors such as location, occupancy rate, and rental trends must still be considered. In general, the requirements for real estate allocation are core cities, core locations, and satisfactory returns.

In addition, the person in charge of the above-mentioned insurance asset management company said that behind the active search for real estate investment opportunities by insurance funds, there is also a trading logic of special opportunities. The prices of real estate assets have dropped significantly. Although the vacancy rate of some projects has increased or the rent has declined, high-quality projects are still attractive. As interest rates fall and the returns of other fixed-income assets decline, the allocation value of high-quality real estate will gradually be reflected.

Investing through private equity

One change in insurance funds investing in real estate is that more and more insurance funds are participating in real estate project investments through private equity funds.

An executive of an insurance company who has been looking for real estate investment opportunities told a Securities Times reporter that large insurance companies have financial strength and tend to invest directly themselves, but real estate investment places high demands on the professional level of the investment team. Many insurance companies still need to accumulate experience in this regard. Therefore, many insurance institutions still choose to "borrow a boat to go to sea" and cooperate with professional real estate private equity managers.

It can be seen from public information that some insurance companies have invested in establishing real estate private equity investment funds.

What has attracted attention is that at the end of last year, Xinhua Insurance invested 9.999 billion yuan and jointly established a 10 billion real estate investment fund with CICC Capital, and has currently invested in 100% of the equity of Beijing Wanda Plaza Industrial Co., Ltd. and Yantai Zhifu Wanda Plaza Co., Ltd. Sunshine Life Insurance invested 5.5 billion yuan and jointly established Lishui Lianrong No. 1 Equity Investment Partnership (Limited Partnership) with Zhonglian Qianyuan Real Estate Fund. The latter has several subsidiaries and has taken over several Wanda Plaza projects.

Xinhua Insurance once announced that it has established a real estate fund as a limited partner (LP) together with CICC Capital (as a general partner GP). The investment strategy is to invest in enterprises that hold real estate project assets directly or indirectly through equity and other means. It mainly relies on the investment advantages of professional institutions to expand investment channels and explore investment opportunities.

The above-mentioned insurance company executives said that some small and medium-sized insurance companies are also optimistic about real estate investment opportunities, but due to limitations in capital and professional capabilities, the realistic choice is to "stick to the big guys", that is, to become one of the LPs of the real estate fund and obtain a certain fund share. This is a way for them to share in the real estate investment opportunities.

Some cases can be seen in public information. For example, Hengqin Life Insurance used this method to take advantage of the GP Dajia Investment Holding (a wholly-owned subsidiary of Dajia Life Insurance) and participated in the investment in the Shanghai Zhoupu Wanda Plaza project together with Dajia Life Insurance as an LP.

A person from a market-oriented private equity fund analyzed to the reporter that one advantage of investing through private equity funds is that, compared with direct investment in real estate, investing through private equity funds can avoid the problem of annual assessment of whether book assets have been impaired, which helps to stabilize the financial statements.

Previously, in order to support the stable and healthy development of the real estate market, the China Securities Regulatory Commission launched a pilot program for real estate private investment funds in February 2023, and guided the Fund Industry Association to establish a new category of "real estate private investment funds" under the framework of private equity investment funds, and adopt differentiated regulatory policies. The investment scope of real estate private investment funds includes specific residential housing (including existing commercial housing, affordable housing, and market-oriented rental housing), commercial business premises, infrastructure projects, etc.

Expected earnings decline

It is reported that the interval returns of real estate private equity funds during the holding period mainly come from the income from the leasing and operation of the underlying assets. The specific returns are related to the project location, operating conditions and transaction structure design.

An insurance chief investment officer who is familiar with the market situation told reporters that insurance institutions that proactively deployed in advance "grabbed" relatively high-quality projects and had good returns. Last year, some insurance funds' investments were like "helping timely help" to real estate companies. Some peers got high-quality projects located in core areas with good conditions and transaction structures, with returns of 8% or even 9% during the period, and the internal rate of return (IRR) of the project exit was no less than 10%.

According to research and calculation data provided by industry insiders, the high-quality projects invested in last year are expected to have a holding period return of 7.5% to 8.2%, and the IRR at exit is expected to reach 9.5% to 10%.

According to a real estate investment person from the aforementioned insurance-related private equity management company, it has invested about 1 billion yuan in a complex located in Shanghai's old commercial district, which includes Grade A office buildings and street-level businesses. The profits will be distributed first during the period, and the partners have good capabilities in operating commercial assets. The project's current distribution income is expected to be 5.5%, and the expected exit IRR is about 8%.

"Such a level of return is undoubtedly very attractive to insurance funds facing a shortage of non-standard assets," said the aforementioned insurance chief investment officer.

Perhaps because of this, the industry feels that more insurance funds are looking for relevant investment opportunities this year. Along with this, the above-mentioned insurance investment officer said that since the beginning of this year, the expected return has directly dropped by 2 percentage points, which is a very obvious drop, "which also shows that the competition has suddenly become fierce."

However, several other insiders told reporters that among the current cases of insurance funds investing in real estate, some are actually debt swaps. Some large insurance companies and real estate companies have jointly developed real estate projects, or large and medium-sized insurance companies have previously allocated a large number of non-standard assets, and the real estate projects they have recently taken over have the background of debt repayment. Industry insiders said that there is a substantial difference between debt swap projects and active investment projects, and the expected returns will also be significantly different.