Time is right for China to embrace REIT benefits

Source:Global Times Published: 2017/8/21 18:38:39

Illustration: Peter C. Espina/GT

Real estate investment trusts, known as REITs, have long been a key missing piece of the real estate industry puzzle in the Chinese mainland.

Admittedly, some concerns have caused government regulators to put on hold plans to launch the country's own REIT market. But there's now really nothing to stop them from creating an indigenous formula for REITs. And it's actually becoming all the more important for the country to build its own REIT market, given the increasing significance of guarding the world's second-largest economy against housing bubble risks, as part of a broader drive to prevent systemic financial risks.

REITs are investment vehicles that securitize property assets and allow for steady and stable proceeds for investors. They are considered an effective device to rein in frothy property prices, as they help channel funds in the capital market toward property owners and operators as well as providing individual investors with a liquid stake in properties, which of course dampens their real estate buying desire.

Nevertheless, eight years after the central bank and other government agencies agreed on an overall framework for initial trials, the REIT market has yet to be officially launched in the country, even though REITs have become commonplace in other Asian markets, notably Singapore. As Asia's second-largest REIT hub, behind Japan, Singapore has become an increasingly attractive market for issuers seeking to float foreign property assets. Chinese and US assets, among assets from other countries, have contributed to Singapore's diversified REIT listings.

The Chinese government has recently called for ramped-up development of the home rental market in bigger cities. A total of 12 cities including Guangzhou, Zhengzhou and Hangzhou have been designated for a trial program that aims to give renters the same rights as homeowners so as to jumpstart China's rental market. This could provide impetus to set up the country's REIT market as well, as it will encourage the professional leasing business, which can ensure yields from securitized property assets. It's noteworthy that the shift from reaping rapid gains by buying land for development toward earning long-term rewards through leasing businesses will fuel demand for REITs over time and ultimately result in a breakthrough in the country's efforts to set up its REIT market.

Progress with REITs could begin with a pilot program on a city-by-city basis, as it will be easier to manage. And various participants such as banks and lawyers can consider a workable framework for a nationwide launch.

It makes particular sense to step up efforts to officially kick off the REIT market in the current context, as REITs can promote transparency and reduce financial risks, which fits nicely into the central government's call for action to avoid systemic financial risks.

REITs are very specific, with a lot of conditions for the investment. For example, a REIT can ban investing in anything other than real estate, and can mandate the investment to focus on Chinese property only, which means it's not allowed to go outside the territory to buy assets in the US, Vietnam or other countries. Also, in terms of asset valuation, REITs won't cause investors to go crazy about the property assets underlying the REITs.

Certainly there are concerns in the country over how REITs should be taxed, which will involve an overhaul of the current tax regime. But the tax issue has been well addressed in other markets and given that REITs backed by mainland assets already exist in Singapore, which naturally involves a lot of tax issues, there's no reason why REIT listings can't take off in the mainland market.

The article was compiled by Global Times reporter Li Qiaoyi based on an interview in Singapore earlier in August with Eng-Kwok Seat Moey, managing director and head of Capital Markets at DBS Bank. bizopinion@globaltimes.com.cn

Posted in: INSIDER'S EYE

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