Following the release of the Guidelines for the Pilot Filing of Real Estate Private Investment Funds (Trial) (commonly referred to as “Circular No. 4”) by the Asset Management Association of China (AMAC) in February 2023, real estate funds have garnered significant attention in both private investment and insurance sectors. While real estate funds are not a new concept for insurance companies, uncertainties persist regarding their classification, the applicability of regulatory requirements, and how changes introduced by Circular No. 4 align with existing regulations. In this context, we aim to provide a concise overview of key practical issues related to real estate investments by insurance companies.
I. Should an investment in a real estate fund be categorized as a real estate-related financial product or as an indirect equity investment?
According to the Notice on Strengthening and Improving the Proportional Supervision of Insurance Fund Utilization, domestic real estate assets primarily include physical real estate, infrastructure investment plans, real estate investment plans, real estate-related insurance asset management products, and other financial instruments linked to real estate. The regulatory framework overseen by the China Banking and Insurance Regulatory Commission (“CBIRC”) does not explicitly categorize real estate funds as a distinct type of real estate-related financial product. Consequently, before 2022, the classification of real estate funds was unclear.
Given that most insurance companies have equity investment management capabilities, and considering that the requirements for fund managers’ professional personnel and managed asset balances are relatively lower for indirect equity investments compared to real estate-related financial products, insurance companies generally classified real estate funds as indirect equity investments rather than as real estate-related financial products.
At the end of 2021, the CBIRC clarified the nature and applicable regulatory framework for real estate funds through its official Q&A platform. According to the CBIRC’s response, “Private equity funds invested in by insurance companies, where the underlying assets are real estate, should be classified as real estate financial products and must comply with the Tentative Measures for Investment in Real Estate by Insurance Funds (“Circular No. 80”). These investments are not subject to the Interim Measures for the Administration of Insurance Funds’ Equity Investment (“Circular No. 59”).” In other words, when insurance companies invest in real estate funds, both the investors and fund managers, as well as the funds and their investment targets, must adhere to the requirements for real estate financial products outlined in Circular No. 80 and Circular No. 59. They are not required to comply with the regulations governing equity investments.
II. Alignment Between Insurance Companies’ Investment in Real Estate Funds and the New Provisions of AMAC
A. Are real estate funds invested by insurance companies required to be classified as “Real Estate Private Investment Funds”?
As to whether the real estate funds invested by insurance companies must be “private equity investment funds in real estate” (“pilot funds”), Circular No. 4 and the Explanatory Notes on the Draft of the Guidelines for the Pilot Filing of Real Estate Private Investment Funds (Trial) provide a relatively clear answer.
According to the aforementioned documents, fund managers participating in the pilot program are permitted to conduct real estate investments in accordance with Circular No. 4. For those not participating in the pilot, existing business models and filing requirements remain unchanged, allowing them to continue making equity investments in sectors like affordable housing, commercial real estate, and infrastructure under the current self-regulatory framework overseen by the AMAC. Consequently, real estate funds invested in by insurance companies are not required to be part of the pilot program.
B. Classification of Project Types Such as Logistics Parks and Industrial Parks
Article 2 of Circular No. 80 stipulates that insurance companies’ investments in infrastructure-related real estate must comply with the Measures for the Administration of Indirect Investment in Infrastructure Projects by Insurance Funds and related provisions, while investments in non-infrastructure real estate and related financial products are governed by Circular No. 80. This makes it necessary to distinguish between infrastructure and real estate projects. However, the CBIRC and the AMAC differ in their classification criteria.
For example, regarding logistics parks, the CBIRC stated in an October 2022 response that under the Tentative Measures for Investment in Real Estate by Insurance Funds, insurance companies may invest in qualified real estate-related financial products. Investments in logistics properties through private equity funds must comply with Circular No. 80 and other regulatory provisions.” This indicates that the CBIRC classifies logistics parks as non-infrastructure real estate, whereas Circular No. 4 includes storage and logistics projects, ports, and industrial parks under infrastructure. If insurance companies invest in infrastructure projects like ports as defined by Circular No. 4, whether this constitutes an investment in real estate financial products remains unclear.
C. Debt-to-Equity Ratio for Insurance Companies Investment in Real Estate Funds
1. From the perspective of insurance fund regulation, are investments in real estate funds required to comply with the 40% cap on debt investments?
According to Circular No. 59, “If an insurance company invests in real estate through the equity of a project company, the project company may use its own assets as collateral for financing, such as obtaining loans from its insurance company shareholders, provided that the financing amount does not exceed 40% of the total project investment.”
In our view, based on a literal interpretation, this provision primarily applies to cases where insurance funds make direct equity investments in real estate project companies. Investments made through funds do not necessarily fall under this framework.
2. For insurance companies’ investment in pilot funds, debt-to-equity ratio restrictions may no longer apply under specific conditions
Under Circular No. 4, a fund providing loans to its invested enterprises must comply with the following requirements:
- The fund contract must explicitly allow such loans, and the necessary decision-making procedures must be followed.
- The loan’s maturity date must not extend beyond the fund’s liquidation date.
- If the fund includes individual investors, it must hold at least 75% equity in the invested enterprise, with the equity contribution accounting for no less than one-third of the total investment (i.e., the maximum equity-to-debt ratio can reach 1:2).
- If the fund consists solely of institutional investors, it must either hold at least 75% equity in the invested enterprise or hold at least 51% equity while the enterprise provides guarantees. In such cases, the debt investment amount may be determined by the fund contract.
Thus, if a real estate fund invested by insurance companies has only institutional investors and meets the investment ratio requirements and other stipulated provisions, the debt investment ratio is unrestricted.
3. Insurance funds’ investment in non-pilot funds remain subject to the 20% debt investment cap
According to the Several Provisions on Strengthening the Regulation of Private Investment Funds, private funds engaging in lending activities must adhere to the following rules:
- The maturity date of such loans must not exceed the exit date of the corresponding equity investment.
- The fund’s assets used for lending must be limited to 20% of the total contributed capital.
- The loan term must be restricted to one year or less.
Therefore, if insurance companies invest in non-pilot funds, those funds must still comply with the above restrictions.
For further information, please contact:
Liang Bing, Partner, Anjie Broad Law
liangbing@anjielaw.com
