A thoughtful approach

Category: Asia, China, Hong Kong, Global
By Hui Ching-hoo

Regulatory aid may boost China’s public REIT market

China’s public real estate investment trust (REIT), or C-REIT market, has made little headway in terms of growth since the country’s first public REIT, the Penghua Qianhai Vanke REIT, was launched in mid-2015.

However, market experts anticipate that C-REIT products will see improvement this year as regulatory bodies in the Mainland are stepping up to regularise the niche market.

Sunny Zhang, chair of RICS China Commercial Property Professional Group Committee and co-founder of the International Federation for Finance and Real Estate, tells Asia Asset Management (AAM) that the C-REIT market has been in the doldrums with no new public listings since the Penghua REIT.

“Although there were more than a dozen REIT products listed on the Shanghai Stock Exchange, the Shenzhen Stock Exchange, and the over-the-counter platforms over the past two years, they were mainly issued in the form of private funds and asset-backed securities (ABS),” she says.

Citing figures from China Chengxin Credit Rating, Ms. Zhang says there were 12 real estate-related ABS product launches in 2016 with a total size of 33.77 billion RMB (US$4.88 billion). Of this, commercial mortgage-based securities accounted for 20.65 billion RMB.

Ms. Zhang says the ABS products were mainly issued by large enterprises and developers such as HNA Group and China Jinmao Holdings, and backed by a wide array of underlying real estate such as offices, shopping malls, and hotels.

In February of this year, Industrial Bank released the first REIT product on the inter-bank market, the IB Wanxin Yuejia Real Estate Investment Trusts Stage I.

However, the private market is only accessible to a small group of investors and the development of public REITs has lagged, a fact that Ms. Zhang attributes largely to their complex structure and operation.

She says purely Western-style REIT products are unlikely to be introduced in China in the short term because of substantial differences in the taxation and legal systems.

Ms. Zhang points out that Western-style REIT products are viewed as a securitised product with full market liquidity. Income is mainly generated from rentals as well as appreciation in asset values. “On the other hand, C-REIT products are designed with the focus being on rental coverage ratio, credit rating and guarantees from the issuers,” she adds.

According to Ms. Zhang, it may be more feasible to use mutual funds as a platform to hold various ABS.

Victor Yeung, managing partner of Hong Kong-based real estate manager, Admiral Investment, tells AAM that mutual REITs are still in a testing phase in China. “There are only a number of listed vehicles today. In (the) absence of a formal law, it is difficult to compare current China REITs to the global standard because they are still a moving target. We prefer the niche market to be defined by the law of the land because a formal law provides much more certainty to what the REITs can and cannot do.”

He says successful REITs around the world typically own mainly rental property, and development activities are usually only complementary to overall earnings. In addition, these REITs pay out most of their rental incomes as dividends, after deducting expenses. “We hope that C-REITs will be developed along these lines,” Mr. Yeung says.

He goes on to add that “a thoughtful” REIT market “would help channel retail capital into the commercial real estate market. This would provide individual investors with a vehicle that provides respectable cash income.”

Chinese authorities have pressed ahead to further regularise the market. In March 2016, the National Development Reform Commission and the State Council released guidelines for financial institutions to develop trials of REIT products.

Earlier this year, Hong Lei, president of the Asset Management Association of China, urged the authorities to speed up reform of real asset securitisation and mutual REIT development as a means to provide alternative financing channels for cash-strapped property developers.

Ms. Zhang says Mainland regulators have accumulated considerable experience in REITs over the years. This, coupled with professional practitioners having a better understanding of taxation, accounting, legal advice, and rating assessment, is viewed as conducive for the Chinese government to issue substantive REIT regulations this year.