Now YouTube app will start downloading videos you want to watch. You still need to press play button over network for the first time and can also save videos to your watch it later list. If you want to cache the videos from your subscriptions, open Youtube app, tap on menu, go to Settings tab, touch Preloading and enable both "preload watch later" and "preload subscriptions" function.
These instructions are based on YouTube 4.0.23 version. Currently the Nexus 7 do not support the new feature. The product team is aware of this and looking into options of adding this functionality in.