Taiwanese to invest over €9b in real estate by 2019

On the back of record low yields in their domestic market and recent concerns over a slowing home economy, Taiwanese insurers are forecast to spend over €9 bn in real estate globally over the next couple of years.

In the last 12 months alone, Cathay Life, one of Taiwan’s largest life insurers, acquired the Walbrook building in the City of London for $881 mln (€796 mln) while Fubon Life purchased Madame Tussauds for €457 mln.

Earlier this month, Taiwanese insurer Fubon Life emerged as the buyer of Brussels' Ellipse building in what is believed to be the first investment ever by a Taiwanese player in Continental Europe. Although financial details were not disclosed, the transaction – Belgium’s largest office deal so far this year – is understood to amount to around €215 mln.

‘We have only just started to see their first moves into Europe,’ commented Nigel Almond, head of capital markets research at C&W.

INVESTMENT WAVE
The surge in transactional activity follows the relaxation of investment rules by the local government amid concerns that domestic insurers were taking an overly dominant position in the market.

As such, insurers were allowed to invest overseas in 2013 and around the same time the Taiwanese Financial Supervisory Commission (FSC) also raised the minimum required yield on property investment from 2.125% to 2.875%, prompting investors to seek higher-yielding opportunities in offshore markets. More recently this rate has been lowered to around 2.5%.

‘These changes allowed Taiwanese insurers with a risk-based capital ratio over 200% to invest up to 10% of their shareholders’ equity in offshore real estate. This limitation is nevertheless relatively flexible since insurers are permitted to invest beyond that on being granted special approvals from the competent authorities,’ added Almond.

Since 2014, Taiwanese insurers have also been permitted to acquire cross-border properties with borrowed funds from their parent companies. They are therefore currently able to make overseas real estate investment through four means: (1) direct investment under their own names; (2) setting up special purpose vehicles (SPVs); (3) providing loans to SPVs with funds borrowed from their parent companies, and (4) entering into trust contracts.

EUROPEAN EXPANSION
The past four years have seen Taiwanese insurers more than double their total real estate holdings from €14 bn in 2011 to €33 bn in H1 2015, research from C&W shows. Over the same period, their real estate allocation as a percentage of total assets under management rose from 3.6% five years ago to 5.8% at present, a higher share than other insurers in the region.

Although having the potential to be significant global investors, the growth potential compared to their Chinese counterparts is lower, noted Almond. ‘This reflects the smaller size of the Taiwanese market,’ he said. On the other hand, he added, Europe ranks high on their shopping list, given that they are currently not allowed to invest in the US where local regulation prohibits financial holding companies from acquiring assets other than for self-use purposes.

‘This puts Europe in a favourable position as they are typically looking for prime standing investments matching their long-term liabilities. Stable, long-term income-generating asset types such as office, industrial, retail and hotels will be their main focus of attention.’

Like their peers in the region, Taiwanese insurers will primarily target leading gateway cities with higher transparency and liquidity for their initial wave of overseas investment. ‘The Taiwanese will look at gateway cities offering core investment product with lot sizes typically over €100 mln. Even though their target markets across mainland Europe are the so-called big five in Germany and Paris, Fubon has successfully invested in Benelux so we can expect a broader push across Europe where core income returns are attractively priced,’ explained Argie Taylor, partner in the cross-border capital markets team at C&W. However, so far, over 90% of their offshore real estate holdings have been concentrated in London.

The Taiwanese also have a consistent track record in paying around the mid to low 4% mark around London in the search for quality assets, added Taylor. ‘As competition remains strong for core offices, we could see them moving into other sectors such as retail. We have seen Fubon Life move into leisure with the acquisition of the popular London tourist attraction, Madame Tussauds, but this reflected the exceptionally long lease.'

On the other hand, he continued, Taiwanese insurers are less likely to follow in the footsteps of their Chinese peers and expand into development projects. 'They are only allowed by regulations to invest in real estate that generates immediate profits at the time of investment,’ he explained.