For Taiwan’s Insurers, the Opportunity of a Lifetime

Source: CBRE Research, Real Capital Analytics
Source: CBRE Research, Real Capital Analytics

Faced with a tepid home property market, Taiwan’s life insurers are increasingly investing in high-yield overseas property.

Taiwan’s cash-rich life insurers have scant investment opportunities at home, as yield levels have flagged in recent years amidst an overheated property market and weak rental growth. Insurers are constrained by minimum yield requirements set by the Financial Supervisory Commission (FSC). They say it is impossible for them to be assured of meeting the current rate of 2.485% per annum.

Even premium properties in Taipei’s coveted Xinyi business district have struggled to attract investment. In October 2015, two Grade-A office-building auctions in Xinyi, for the Shin Kong Manhattan World Trade Building and the A8 building near the Shin Kong Mitsukoshi Department Store, both failed to find a bidder. Shin Kong ultimately sold the A8 building to Fubon Life Insurance two months later for about NT$27 billion (about US$870 million). It has yet to find a buyer for the Manhattan World Trade Building.

Increasingly, insurers are looking overseas for better returns, buoyed by the FSC’s gradual relaxation of restrictions on global property investments. Among Taiwanese insurers, “everyone is aggressively searching for overseas opportunities,” says Joyce Huang, a director at Fitch Ratings in Hong Kong who covers the insurance sector. “They are flooded with liquidity but have very few attractive investment options in Taiwan.” The Life Insurance Association of the Republic of China, a Taipei-based NGO, estimates that domestic insurers have roughly NT$20 trillion (US$631.1 billion) in funds available for investment, which it says will largely be invested abroad.

The FSC’s latest move to facilitate investment by life insurers in foreign property came in March. Under the new initiative, Taiwanese insurers in sound financial condition are permitted to deploy a larger percentage of their assets offshore – including foreign property and fixed-income assets. The insurer’s risk-based capital ratio (RBC) rather than net worth now determines allocations.

Prior to March, Taiwanese insurers’ allocations for overseas investment were capped at 30% of total assets. The new initiative has introduced a three-tiered system. Tier-three insurers, those with an RBC ratio above 300%, may invest 40% of their total assets or 3% of their investment capital abroad. The option with the lower value must be selected.

Insurers in the second tier, which have a 250% to 300% RBC ratio, may invest abroad up to 40% of their total assets, or 2.5% of their investment capital. Finally, insurers with an RBC ratio of below 250% are classified as tier-one, permitting them to allocate overseas just 10% of total assets, or 1% of their investment capital.

“The new rules will benefit medium-sized insurance companies in good financial shape, as it will allow them to allocate more capital to overseas real estate,” says Joseph Lin, managing director of CBRE Taiwan. “However, large insurance companies that have purchased property overseas may become more cautious,” he says, noting that they will not be permitted to apply for an additional quota should their total investment exceed the ceiling amount. Large insurers such as Cathay Life and Fubon Life which have already made some investments abroad will “need to use their remaining quota wisely,” he adds.

Investing in the UK

The United Kingdom has been the overseas market of choice thus far for Taiwan’s life insurers, who had invested about NT$784.3 billion (US$23.2 billion) there as of June, according to data compiled by the FSC. London property has attracted the most interest. “Insurance companies are interested in London properties as it is a mature market as well as a gateway city,” says CBRE’s Lin, adding that yield rates in London average 4-5%, well above the average in Taiwan.

Further, the UK government offers global property investors favorable taxation terms and transparent registration processes that meet FSC requirements, market observers say. In a 2014 statement, Cathay Life noted that the UK’s Jersey Property Unit Trusts (JPUT) “is a tax-efficient vehicle for holding interests in UK commercial real-estate properties,” and that it “provides transparency in income tax and exemption from British capital gains tax on the sale of the underlying property.”

Cathay Life was the first Taiwanese insurer to foray into the London market with its purchase of the Woolgate Exchange building in the City of London financial district for £320 million (US$435.1 million) in July 2014. Cathay bought the property from U.S. private equity firm TPG and Canadian investor Ivanhoé Cambridge. In 2015 Cathay also bought the Walbrook Building in the same district for £575 million (US$765 million) in one of the largest single-property purchases in the British capital last year.

Fubon Life was the next to move into the London market, in 2015 purchasing the Bow Bells House at 1 Bread Street for £197.2 million (US$267.2 million), a property with the dual address of 1 Carter Lane and Two Old Change Court for £138.8 million (US$184.9 million), and the site of the Madame Tussauds waxworks museum for £348.8 million ($464.1 million).

Taiwan’s No. 3 insurer, Shin Kong Life, first tapped the London property market in December 2015 with the purchase of 40 Gracechurch Street in the City of London for £136 million (US$181 million). Shin Kong expects the building, its first overseas purchase, to yield NT$300 million (US$9.5 million) in annual rental proceeds and generate an investment return of over 4%.

The UK’s June decision to leave the European Union is not expected to reduce the rental income of Taiwanese insurers, according to the FSC. The Commission expects “Brexit” to affect the British property market, but since Taiwanese investors have signed long-term lease contracts for their London properties, their rental income should remain stable. “The inherent attractions of the UK such as transparency, the rule of law, political stability, and market liquidity will continue to attract institutional investors,” says CBRE’s Lin.

Further loosening?

Looking ahead, analysts say the large U.S. commercial property market should be attractive to Taiwanese insurers – but flexibility is required because of high taxation rates. “In the U.S., property investors need to be flexible enough to structure a deal to be tax-efficient,” says CBRE’s Lin. “Current regulations in Taiwan do not allow them to do that. They have to hold 100% of a foreign property rather than 49% [which would offer a more favorable taxation rate] to be in compliance. Maybe the FSC doesn’t classify shareholding as a direct real-estate investment.” Industry players are lobbying the FSC to make it easier for them to invest in the U.S. property market, he adds.

In the meantime, Taiwanese insurers may be missing out on prime investment opportunities. “The U.S. is among the most attractive destinations for Asian commercial property investors,” says Lin, noting the flood of Chinese investment that has entered the market there this year. Through May, Chinese companies had bought or were buying 47 U.S. properties valued at US$9.3 billion, according to Real Capital Analytics, a firm that tracks commercial-property transactions.

Japan could be another market of interest for Taiwanese insurers. In a February research note, Nippon Life Insurance chief analyst Mamoru Masumiya forecast that Asian insurers, including those from Taiwan, will be likely to invest in Japanese properties in the near future as their assets under management rise. “Taiwanese distinguish themselves as the most aggressive property investors among Asian insurers with quite high property-to-total-asset ratios,” he wrote. Masumiya noted that Cathay Life has property asset levels equivalent to Japan’s Nippon Life Insurance, “which is stunning considering that the property stock in Taiwan is much smaller than in Japan.”

In December, Shin Kong Financial announced that its board had approved a plan to purchase Tokyo commercial property. In a statement, the company cited Japan’s attractive yields of more than 7% and the low cost of financing (interest rates in the 0.8-1% range) as reasons for its interest in the transaction. The deal is pending Japanese regulatory approval.

Taiwan’s domestic property market, meanwhile, remains relatively quiet. A massive one-off deal helped commercial property sales reach NT$25.2 billion (US$777 million) in the second quarter, nearly a threefold increase from the same period a year earlier: the sale of a prime mixed-use development in Kaohsiung to Taiwan Life Insurance Co. for NT$16.5 billion (US$520.7 million). That deal aside, the property market was anemic, market insiders say.

Given that situation, will regulators further loosen restrictions on overseas property investment? “They’ve been continuously relaxing regulations since 2012,” says Fitch Ratings’ Huang. “They continue to look for ways to facilitate overseas investment.”