SUN WUKONG China's insurers denied run of property
By Wu Zhong, China editor
HONG KONG - The welcome by Chinese property developers to the news that
insurance companies will be allowed to invest directly in real estate has been
countered by financial analysts; they caution that the impact on the property
market will not be as immediate or as strong as some expect.
The government, concerned that investment losses by an insurance company would
hurt the interests of policy holders and thus may cause social instability, has
imposed strict restrictions on an insurer's use of its capital, which mainly
comes from policy premiums. The country's first Insurance Law, enacted in 1995,
stipulated: "The use of the capital of an insurance company must
be restricted to bank deposits, trading in sovereign bonds, financial bonds and
in other ways approved by the State Council."
These limited channels of investment in low-risk, low-yield bonds restricted
the growth of insurers' profits, while also reducing their risks of losses.
The law was revised in 2002 to slightly broaden investment channels by allowing
insurers, in principle, to buy and sell securities traded on the Shanghai and
Shenzhen stock exchanges. The China Insurance Regulatory Commission (CIRC), the
top watchdog of the industry, raised the quota for securities investment by an
insurance firm from 5% of its total capital to the present 15%.
To further ease restrictions on investments by insurers, the Standing Committee
of the National People's Congress made a second revision of the Insurance Law
in February, expanding the investment range to include real estate. The revised
law went into effect on October 1.
In practice, however, the stipulation needs to be further interpreted and
explained by the relevant administrative authorities before it can be
implemented, as was the case in allowing insurance companies to invest in
securities.
The CIRC has therefore drafted some rules on investment in real estate which
will be presented to the insurance industry for consultation.
According to Chinese media, the draft rules set no quotas on property
investment by an insurer - but this does not mean no quota will be set. The
influential China Securities Journal said the quota would be announced when the
rules formally went into effect.
According to a study by China International Capital Corp Ltd (CICC), the
country's first joint venture investment bank, the quota is likely to be 5%,
gradually increasing to 15%. Statistics from CIRC, the insurance regulator,
showed that by the end of last year, the total assets of all insurance
companies in China had reached 3.34 trillion yuan (US$489 billion). If 5% of
this is allowed to be invested in real estate, about 170 million yuan could
enter the property market to start with. The CICC expects this could increase
by between 15 billion yuan and 20 billion yuan each year, given the
approximately 10% growth of the insurance industry in recent years.
Property developers are generally excited about the possible inflow of new
funds into the market. A senior executive of a large developer in Shanghai told
Xinhua that insurers may cooperate with big developers because they lacked
experience and expertise in the real estate market. Hence, large developers
will benefit more from the new policy.
But according to both the CICC study and the China Securities Journal report,
the insurance watchdog also intends to set restrictions on real estate
investment by insurance firms. They will likely be banned from investing in
property development, in building and buying residential housing and providing
mortgages, thereby limiting them to buying and selling mainly office and retail
space.
The price of office space in major cities is relatively low and stable compared
with soaring prices in residential housing. The average price of apartments in
Beijing's central business district is 55,000 yuan per square meter, compared
with 31,000 yuan per square meter for office space, according to real estate
consultancy DTZ.
Demand for office space is more directly affected by the real economy,
according to the China Realty Research Center, so unless the economy becomes
overheated, "hot money" normally would not pour in for speculation on office
space because it is difficult to make a quick profit.
Even given the relatively slow process of developing offices in the larger
cities such as Beijing, Shanghai, Guangzhou and Shenzhen, the possible inflow
of 170 billion yuan or so is unlikely to have a significant impact. In such
cities, a decent office building would already cost several hundred million
yuan or even a few billion yuan.
Moreover, as with other reforms, Beijing has already opened the gate for
insurers to invest in real estate. This was done by allowing some companies to
buy office space for their own use - witness the headquarters of insurers such
as China Life, Ping An and Taikang Life on Beijing's Financial Street. Insurers
have already invested at least 20 billion yuan in office space, according to
CIRC statistics.
Another question is whether insurance companies would immediately rush to
invest in real estate once the gate was open. Li Anmin, vice general manager of
Shenzhen-based Hua'an Insurance, told the China Securities Journal that the
company was more inclined to invest in real estate investment trusts (REITs) to
reduce risks. To directly invest in real estate, an insurance company may have
to set up a special department, which would increase overheads. Also, it would
be difficult to quickly find qualified professionals to handle real estate
investment.
Consequently, the new policy is unlikely to have an immediate or significant
impact on the real estate market. In the long run, investment by insurance
funds should help the stable development of the property market, as such
investment eyes long-term yields rather than large profits in a short period.
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