The Yuan is coming!
8 April 2013
Despite economic pessimism and fears of a “triple dip”, London continues to attract overseas investors, both established players and new entrants, looking for prime office buildings let on long leases to solid tenants.
One of the most notable stories from last year was that Asian investors spent more than £2.4 billion on properties in Central London. In particular, 2011 to 2012 saw significant investment from South Korea and Malaysia but 2012 also saw increased activity from Chinese investors. Mayer Brown acted for China Overseas Holdings Limited (COHL) on their acquisition of One Finsbury Circus, London, for £152 million, their first investment outside of Asia. We anticipate further investment in the London real estate market by Chinese investors during 2013.
Underpinning this surge will be legislative change introduced by the China Insurance Regulatory Commission (CIRC). The changes will open up greater opportunities for China’s domestic insurance sector to expand and invest in overseas markets. In 2007, the CIRC issued the Interim Measures on the Administration of Overseas Investments of Insurance Funds (the “Interim Measures”) to establish a basic legal framework for China’s domestic insurance sector to make overseas investments. On 12 October 2012, the CIRC released the Implementing Rules for the Interim Measures. The 35-article Implementing Rules expand the asset categories and jurisdictions in which Chinese insurers can invest overseas and provide detailed requirements for areas such as investor qualifications, risk control and the supervision and administration.
Overseas investments under the Interim Measures were, in practice, limited to investments in Hong Kong. The Implementing Rules specify a list of 45 countries and regions, including 25 developed economies and 20 emerging economies, where Chinese insurance companies may make overseas investments.
The Interim Measures permit Chinese insurance companies to invest in certain types of offshore capital markets products and fixed income products. The Implementing Rules also permit Chinese insurance companies to invest in three types of offshore funds when certain conditions are satisfied – i.e. securities investments funds, equity investments funds and real estate investment trusts (REITs). The REITs should be listed and traded at the exchanges in the permitted jurisdictions.
The most noticeable change under the Implementing Rules is that overseas investments in private equity and real estate are currently allowed. Direct investment by Chinese insurers in overseas real estate is permitted provided it meets certain criteria – i.e. mature commercial properties and office buildings, where there is a stable income and where the property occupies central area in a major city. This would prohibit development projects or investment in secondary cities. The maximum permissible investment for overseas investment will be 15% of their previous year end total assets. This will not be an inconsiderable investment sum. Prior to this, these investors could only invest internally or invest in nominated Hong Kong listed stocks and bonds.
What then will be the impact on the London real estate market? We expect Chinese insurers will take full advantage of opportunities to invest in foreign real estate markets and especially in prime secure London office properties. Chinese insurers have the potential to be a huge source of investment for the international real estate market. The problem historically has been accessing it; however, these new legislative changes will now unlock this potential. Even with the 15% cap, the funds reported to be available for overseas investment are suggested to be in the billions, which will signify a considerable financial investment, fuelling a very competitive London real estate market through 2013 and beyond.