FOREIGN investors, insurers, a growing elderly population and investment trusts will all impact the real estate market.

CHINA'S real estate investment market is going to be buoyant in the next couple of years with a few structural changes as well as opportunities already emerging to catch the spotlight, according to the latest industry research.

While foreign investors are returning to a buyer's role in China with great interest in the retail and office property markets, insurance companies, which finally received the green light on commercial real estate investment last year from the central government, are also anticipated to play a major role in the market due to their strong financial capabilities though significant transactions are yet to materialize. Meanwhile, senior housing, demand for which has been growing rapidly as China looks to become the nation with the largest population of elderly in a matter of years, may also evolve to a major investment area in the near future as it is encouraged by the government and might be particularly attractive to domestic investors who are currently facing ever-tightening lending controls. As for Real Estate Investment Trusts (REITs), a long-anticipated alternative funding source, it is widely believed that they will probably continue to sit on the sidelines until a regulatory framework is finally worked out.

Recession-hit foreign investor levels pick up

The activity level of foreign institutional real estate investors started to pick up significantly in 2010 as they shook off the effects of the global financial crisis. Out of the total US$15.02 billion worth of major real estate investment deals secured across the country last year, 41 percent were accomplished by foreign investors, a significant increase from only 14 percent registered in 2009, according to data released by Jones Lang LaSalle.

By source of capital, investors from other parts of the Asia Pacific region have been particularly active. They, for instance, purchased en bloc real estate assets worth a record US$5.1 billion last year, compared to US$3.5 billion in 2007, US$3.04 billion in 2008 and US$1.34 billion in 2009. As for those from outside the Asia Pacific region, their en bloc real estate investment purchases fell below US$1 billion for the third straight year in 2010 after peaking at nearly US$3 billion in 2007.

As a note of interest, there has also been a major difference between the two foreign investor groups. While United States and European-based investors are more cautious as they have been overwhelmingly focused on the Shanghai market where trading stocks are becoming almost limited, Asia-based real estate investors, especially those from Hong Kong and Singapore, have more often displayed a willingness and ability as well to seek suitable assets under a much broader radar when they are making en bloc investment all across the country. Insurers' mark on real estate market won't be sudden

The emergence of insurers as direct real estate investors has been one of the most high-profile changes of recent years though their significant participation in the market is still yet to be felt.

In the third quarter of last year, China's insurance companies were finally given the approval from the China Insurance Regulatory Commission to invest in direct real estate assets. Under the current regulations, Chinese insurance companies are allowed to invest in property as well as property-related financial products by a maximum 10 percent of their total assets, which stood at slightly more than 5 trillion yuan (US$770 billion) at the end of 2010.

However, despite their extremely huge purchasing power, Chinese insurers are not yet ready to play a dominant role in the market. Key challenges to be met by the country's insurers in the coming years mainly include a lack of real estate investment management talent as well as investment-grade assets, internal risk management and asset management capabilities. It will likely take another 12 to 24 months before insurance companies show up in the country's en bloc real estate investment market in a significant way, which seems certainly inevitable as real estate proves to be an ideal long-term asset for insurers to offset their long-term liabilities, according to earlier predictions made by Jones Lang LaSalle. Growing elderly population opens new opportunities

With a growing aging population and the improved affordability of the elderly, China's senior housing is developing into a potentially lucrative real estate sector that has yet to be fully tapped.

By 2015, the number of people living in China over the age of 60 will exceed 200 million across the country, accounting for more than 15 percent of the total population, according to a recent DTZ report on senior housing. This will make China not only the world's most-populated country, but also the country with the largest proportion of the elderly. The figure, coupled with the scenario that there is currently a severe lack of supply of senior housing other than nursing homes in the domestic market is therefore creating big opportunities for investment into the segment.

Notably, a short payback period, reliable sources of income, a short approval process, tax incentives and government subsidies, market stability as well as an independent business cycle are some of the key advantages that may make senior housing an alternative low-risk asset class, DTZ researchers found. As far as an appropriate regulatory framework is established and enforced, senior housing is set to become a profitable alternative investment channel in China in the foreseeable future. REITs yet to materialize on Chinese exchanges

While the emergence of Real Estate Investment Trusts (REITs) in China seems to be one of the most keenly anticipated developments in the real estate industry, they have yet to materialize on either of China's two exchanges or its interbank market. When the central government is still sorting out regulatory issues for REITs on the Chinese mainland, Hong Kong already pushed forward a step in late April with the launch of the first yuan-denominated REIT, paving the way for future listings in Hong Kong, other offshore yuan markets such as Singapore and potentially even Chinese mainland, Savills China concluded in its latest report.

Coordination between the China Banking Regulatory Commission, China Securities Regulatory Commission and the People's Bank of China will be needed before REITs finally materialize and interbank REITs are expected to precede exchange-listed ones on the Chinese mainland, Savills forecast, given the relative number of regulatory issues which will need to be resolved.

A number of factors continue to delay the establishment of REITs on the Chinese mainland. For starters, China's real estate market is still in the development stage, meaning that the number of stable, income-producing assets remains limited. This results in a minimal number of opportunities, which would satisfy REITs' strict requirements.

The biggest obstacle, however, comprises tax issues. Under the current tax framework, a 5 percent business tax and a 25 percent corporate tax would be placed on the REIT entity; while a 30 percent to 60 percent land value appreciation tax, a 3 percent to 5 percent deed tax and a 0.05 percent stamp duty tax would be placed on property transactions. To make REITs more cost efficient, new regulations would need to be specifically designed and agreed upon, according to Savills research.