China plans to let funds, brokers launch REITs

SHANGHAI: China plans to allow fund houses and brokerages to launch real estate investment trusts, or REITs, that would be publicly traded on the Shanghai and Shenzhen stock exchanges, two people with direct knowledge of the proposal said.

REITs should be launched in the form of closed-end funds via special asset management firms, in which property developers can also own a stake, according to draft rules issued by The China Securities Regulatory Commission (CSRC) for consultation, the people said.

The draft rules are subject to changes and it is not clear when they will be officially published.

China's bourses are competing with the country's interbank market in launching China's first REITs as soon as this year, as Beijing accelerates financial reforms to support a slowing economy and the property market.
"REITs are liquid investment instruments that would enable individuals to invest in properties even with only a few thousand yuan," said Alex Wang, real estate lawyer at Paul, Hastings, Janofsky & Walker LLP.

He added that REITs would mean a new source of funding for developers and may create a new exit channel for foreign property investors in China such as Morgan Stanley.

A REITs market in China would also generate new revenue streams for fund companies and brokerages, such as Haitong Securities Co and Harvest Fund Management Co.

But analysts noted that a shortage of qualified properties, uncertainty over tax treatment and fears of irrational price swings all threaten to delay the launch of REITs in China.

REITs, which invest mainly in commercial and industrial properties and pay most of their rent as dividends, have been long-established in the US and Australia but only caught on across Asia over the last five years.

China's stock exchanges appear to be lagging the interbank market in the race to pioneer the REITs market.

The People's Bank of China plans to submit a proposal to the State Council, or Cabinet in September, seeking approval for the launch ofREITs in the interbank market by the end of this year, the Caijing magazine reported on Monday.

Developers including Shanghai Zhangjiang Hi-Tech Park, Shanghai Jinqiao Export Processing Zone Development Co Ltd, Shanghai Lujiazui (Group) Ltd and Shanghai Waigaoqiao (Group) Co Ltd are likely to raise money via REITs in a pilot programme, Caijing reported.

Creating a domestic REITs market was part of a financial reform package unveiled by the government last December to aid the rapidly slowing economy and help developers, which at that time suffered from stagnant sales, tight credit and a frozen IPO market.

The real estate market has rebounded sharply this year after China unveiled a massive stimulus plan and boosted lending, making developers less willing to sell high-yielding properties.

"One major problem is that there's a shortage of qualified properties to be bundled into REITs," said one person familiar with the situation.

He added that for REITs to be attractive enough to investors, the underlying assets must generate an annual rental yield of 7 to 8 per cent.

It is a challenge especially at a time when the global economic downturn saps demand for lodging and office space in China, with prime office rentals in major cities falling in the first six months, real estate consultancy CB Richard Ellis said.

By Reuters