A rule change in Taiwan is likely to spur capital flow out of the country and into overseas property markets. As of early May, insurance companies-- which could previously only buy domestic property -- are now allowed to invest in real estate outside Taiwan.
Combined, the insurance companies control $450 billion in capital. But there is a cap on the amount they can invest under the new law--it cannot exceed 10 percent of shareholders' equity. The insurance company also cannot borrow at all for the purchase. Still, the new law is likely to see around $2.6 billion move overseas.
Insurers are likely to buy entire office properties, looking to improve on the very low rental yields in Taiwan, which run around 2.3 to 2.5 percent, analysts predict. They already own around one-third of the Grade A office buildings in Taiwan; international investment will give them a key source of diversification.
"Ideally they would like to buy en bloc, and primarily office [property] - it is comparatively easier to manage," Joseph Lin, managing director of CBRE's Taiwan office, said. Although insurers have invested in other asset classes such as retail and hotel properties in Taiwan, he believes they will look for cautious flagship office properties with predictable income streams outside their home country.
"I don't think they will go opportunistic," Lin added. "They will stay with core and core plus. The reason why they go outside Taiwan is to avoid risk, not to enter into new risk."
CBRE says mature markets such as London, Frankfurt, New York and Toronto are attracting interest, while the insurance companies are also targeting Shanghai for self use investment, since most of the companies have operations in China. Similarly, Ho Chi Minh City is also attractive for self-use office buildings, though it's too speculative a market for insurance companies to consider for other kinds of investment.
Hong Kong would also be an attractive target, according to CBRE, but the low yields, tight supply and strong local competition are likely to dissuade buyers for now.
Taiwan is in a similar situation to South Korea before it allowed insurance companies and pension funds to buy outside the country. Domestic investors have driven Grade A office space to very high prices, with a large pool of capital chasing only a handful of investment-grade buildings. Insurers have bought around 40 percent of new office properties in Taiwan in the last two years.
Real estate meshes well with insurance companies in that it is a long-term play and, for top-flight buildings with strong tenants, a rental yield that is easy to forecast. That allows insurers to guarantee they have a long-running, steady income stream to meet their payout requirements on policies.
"They will be looking at the rental yield, the transparency of the real estate market, how safe their capital is once they invest in these cities, and how they can retrieve their money on a yearly basis for their rental level," Lin said. "They also want good asset management there to look after their properties."
The change in investment policy is expected to be a trial run by the Taiwanese Insurance Bureau, which is likely to expand the scope of overseas investment if this program works well. Even with domestic investments, insurers are restricted to putting no more than 10 percent of their assets in property. But CBRE says that could eventually result in an equal split between domestic and international real estate.
"Gradually, and hopefully, our regulator can be more creative and not so defensive in terms of investment overseas," Lin said. "But after all this is their first time. Life insurance companies want to make sure it's done right. And on the regulator's side they also want to make sure it's done right before it can be further opened up."