China Life to expand REIT, real asset allocation
China Life Insurance Company will continue to add positions in real assets in China as it expects to benefit from the country’s latest policy proposal to include consumer-related real estate projects into eligible real estate investment trust (REIT).
With an eye on real assets’ capability to generate a stable cash flow and to withstand volatility through different economic cycles, the life insurer said it will increase exposure in these assets to diversify its alternative asset portfolio and improve portfolio resilience in 2023.
The company said it will continue to expand its exposure in public REITs by exploring new REIT listings in the market. It helps that China is encouraging investment in alternative assets — especially in public REITs.
“These real assets (REITs) are introduced to the market at a good time,” said Liu Hui, vice president of China Life Insurance at the company’s annual results press conference in Hong Kong on Thursday.
EXPANDING SCOPE
After approving the first batch of public REITs in June 2021, China has been expanding the scale of fundraising and the variety of public REITs.
Most recently, on March 24, the central government proposed expanding eligible REITs to consumer-related infrastructure in order to boost consumption. This includes shopping malls and farmers’ markets.
“The best news is that mall and office complexes we own will be added to eligible public REITs. So going forward, China Life will be both a quality assets provider as well as an experienced operator and manager,” Liu said.
So far, China Life has had no exposure to China’s residential real estate.
It has a real estate portfolio of projects in new economy real estate (including headquarters of new economy companies), logistics, industrial parks, and commerce and office complexes.
“We will be a long-term value investor to support China’s public REITs market, and in return, diversify our investment and source of return and build a more resilient portfolio,” Liu said, adding that the company also gained a steadily growing cash flow through recent real estate equity investment.
A TOUGH YEAR
As of end-2022, China Life’s investment assets were worth Rmb5.06 trillion ($735.3 billion), a 7.4% increase from end-2021. A total of 1.5% of its assets, or $11 billion, were invested overseas.
In 2022, the company’s net investment income was Rmb190.3 billion, rising by 0.8% year on year. However, due to the impact of the downward trend of interest rates and a significant decline in China’s equity market, its net and overall investment returns were both down.
The net investment yield was 4% in 2022, down by 38 basis points from 2021.
The total investment return (taking into account the current net fair value changes of available-for-sale securities recognised in other comprehensive returns) was 1.92%, down by 2.95% from 2021. This is lower than its competitor Ping An Insurance’s 2.5% return rate in 2022.
As a result, the company’s net profit attributed to equity holders slumped by 36.8% to Rmb32.08 billion in 2022.
PUBLIC OUTLOOK
Going forward, as the Chinese economy recovers, Liu noted that corporate earnings and financing demand are also improving, driving up the market’s risk appetite.
Driven by China’s macro policy of expanding domestic demand and stabilising growth, she expected the policy interest rate to rise slightly this year, with structural opportunities in the A-share market.
When the Chinese stock market hit bottom in late 2022, China Life added positions to its medium- to long-term stock investments.
In 2023, Liu said the focus will remain on controlling risk exposure while paying more attention to medium and long-term allocation.
Within equities, China Life will keep a balanced position among different types of stocks, including traded stocks, equity funds and high-dividend stocks. In particular, it will add allocations to high-dividend stocks, not only to increase income, but more importantly, to reduce volatility and enhance stability.
For fixed income, the life insurer will focus on increasing coupon yields and asset durations. It will take advantage of hopefully rising interest rates to allocate “as much as possible” to interest-rate bonds with long duration and low risk.
Meanwhile, China Life will be on the offensive in adding credit investments in order to consolidate the base of its fixed income position, Liu said.