Move could lead to the listing of US$60b worth of buildings in 5 years
China could kick-start a property trust market next year to give its pension funds and insurers an alternative to volatile stocks and meagre returns from government bonds, according to an industry group.
Mr Mitchell: The trusts are expected to be externally managedThe move could lead to the listing of as much as US$60 billion worth of buildings in the form of real estate investment trusts (Reits) over the next five years.
And although it is unclear whether overseas investors would be allowed to invest in the securities, foreign property funds in China are keen to see new potential buyers for the office blocks and shopping centres they are accumulating.
Stock market watchdog China Securities Regulatory Commission (CSRC) sent a delegation to Australia in May to study property trusts, and is working with other authorities, including the central bank, to draw up legislation.
The trusts will probably be externally managed, in line with the Singapore and Hong Kong model, said Peter Mitchell, head of the Asian Public Real Estate Association, which is advising the CSRC on the matter.
'A pilot Reit could possibly get underway next year,' Mr Mitchell said. 'They see pension funds and insurance companies as the main investors, as well as the man on the street,' he said.
Property trusts, which pay most of their rent as dividends, have been long- established in the United States and Australia, but have caught on across Asia over the last five years as commercial property markets rode a cyclical upswing.
Asian Reit market capitalisation has grown to around US$80 billion, but unit prices have dropped this year - by as much as 24 per cent in Japan - as investors demand higher rental yields to compensate for rising bond yields and inflation.
However, China is pushing ahead with Reits because insurers and pension funds are desperate for the stable returns that they offer to match long-term liabilities. Reits tend to yield more than bonds, and offer capital gain if property values rise, but are typically less volatile than stocks.
Beijing is talking about allowing insurance firms to invest in property; but at the moment, they are only allowed to invest in stocks, bonds and deposits.
Flush with US$300 billion for investment, insurers could spend as much as US$30-40 billion on Chinese commercial property if they followed global industry norms of 10-15 per cent portfolio allocations to property.
If China's Reit market grows along the lines of Japan's, it could be worth some US$60 billion in five years time.
But the experience of RREEF China Commercial Trust, one of three Reits with Chinese assets listed in Hong Kong and Singapore, demonstrates the possible risks ahead for the market.
Last year, the trust found that tenants in its newly acquired Beijing office block - its only asset - paid less rent than expected and blamed the former landlord's team for falsifying lease agreements and tampering with tenant replies during due diligence.
The trust saw its share price plunge by as much as 44 per cent below its initial public offering in the aftermath. It cut the valuation of its building, the twin 25- storey Beijing Gateway Plaza, and sought compensation from the former landlord.
Although Chinese authorities are keen to set up a stable and transparent Reit market, they may not introduce the same tax breaks and trustee structure common in most markets, said Andrew Weir, head of China property at consultants KPMG.
'It might look like a Reit and smell like one but when you delve down, it might not have all the characteristics,' Mr Weir said.
State-owned enterprises (SOEs), keen to trim their balance sheets, would be prime candidates to set up property trusts.
And developers, squeezed by a clampdown on bank loans by a government bent on cooling the housing market, would welcome them as another source of capital. -- Reuters
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