Behind Asia’s Insurance Push into Australian Property

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Monday, September 1st, 2014
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A freeing of regulations in their home countries and a perception of Australia as a good growth economy and a stable place to do business are behind what are expected to be increasing levels of investment by Asian insurance companies into Australian office assets in coming years, a leading commercial real estate research analyst says.

Following a report by international real-estate services firm CBRE which predicted that Asian insurers were set to pump $75 billion into global property markets over the next five years, the firm’s Australian Head of Research Stephen McNabb said that while the precise volume of these funds that would hit Australian markets specifically remained unknown, it was unlikely money from Asian insurers specifically would have a direct and recognisable impact on its own.

He said it was almost certain that commercial property markets in major cities such as Sydney and Melbourne would see additional inbound investment from Asian insurers in coming years.

Such expectations, he said, reflect not only a loosening of restrictions within those countries’ domestic markets but also broader trends in which an increasing proportion of inbound investment into Australian property markets was coming from Asia. Australia – seen as a robust economy and a safe place to invest – was taking a high proportion of overseas Asian investment (around 15 per cent) relative to the size of our economy.

“Australia has been the recipient of strong global capital outflows since 2007,” McNabb said.

“What we have noticed over the past 12 to 18 months is a real shift in the mix about where the capital originated from. Last year, more than 50 per cent was from Asian based investors whereas the previous four years, it has probably been more like 30 per cent from Asia and 70 per cent from Western economies.

“This change is reinforcing what we expect will be a continued shift in the mix of capital coming into the market from Asia.”

On a global scale, expectations of greater levels of overseas investment from Asian insurers is largely being driven by a loosening in regulations in places like China, Taiwan and Korea with regard to both the proportion of their funds which insurers are allowed to invest overseas and the proportion of their funds which can be invested in property.

Having not allowed insurers to invest in real-estate at all prior to 2010, China, for example, now allows overseas property investment among insurers in 45 countries, and this year raised the total proportion of the portfolio insurers can invest in property from 20 per cent to 30 per cent.

South Korea, meanwhile, last year scrapped a two-month approval process insurers previously had to wade through in order to acquire properties abroad.

McNabb says such moves stem from a desire in these countries to allow their insurers to diversify their portfolio, as well as difficulties experienced on the part of some insurers to find sufficient levels of stock in their home markets and a change in the return profile generally which has seen property assets outperform bonds in terms of investment returns.

As with elsewhere, he says any inbound investment into Australia is likely to focus on core assets offering a stable income stream over a long term horizon – such as office assets in the CBDs of Sydney and Melbourne.

McNabb adds that Australia is a stable country with a good legal and investment system and that it was unlikely investors would find any significant difficulties specifically associated with Australia.

He notes, however, that limited overseas experience in general might create broader challenges for Asia’s insurers in any market, including Australia.

With regard to broader Asian interest in the Australian market, McNabb says diversification benefits inbound Asian funds bring to the local market cannot be understated.

“I think this report (the CBRE report) shows that the recent trend in Asian capital coming to the Australian market has some underpinning over the next few years,” he said. “I think that’s important because what we saw last year was US and European purchase activity actually fall.

“Australia requires foreign capital because we have a current account deficit –property is one part of that big picture.  But given that the US and European activity declined, the Asian capital helped to support that element of funding last year.

“It is quite important to have that diversification of sources.”

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