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China looks to real estate investment trusts to tap household savings, while letting the air out of property bubbles

Pearl Liu pearl.liu@scmp.com

China's government this week gave its go-ahead for the set up of real estate investment trusts (REIT), opening a channel that lets investors tap the country's property growth, while limiting their speculation in bricks-and-mortar buildings.

The pilot programme, implemented after more than a year of public consultations, will allow China's mutual funds to issue public REITs that can be bought and sold like stocks on the country's exchanges, according to an April 30 statement by the National Development and Reform Commission (NDRC) and the China Securities Regulatory Commission (CSRC).

The pilot programme marks the most consequential development in China's financial services in recent years, as it adds an investment option for Chinese households while simultaneously taking the air from the speculative bubbles that have stubbornly defied the government's cooling attempts. The timing also gives Chinese policymakers an additional tool to redirect household savings into the capital-intensive property industry, alleviating the burden on banks while the economy tries to claw its way out of its slowest growth pace in decades.

"Unlocking the REITs market now can revitalise existing real estate assets in the short term and help reboot China's economy," said Zhang Zheng, professor at the Peking University's Guanghua School of Management in Beijing. "In the long term, it can optimise the structure of the property market and largely reduce the leverage" among the cash-starved developers, he said.

A REIT is a company that owns and operates a portfolio of property that generates income, typically comprising offices, apartment buildings, shopping centres and hotels. Some speciality REITs manage hospitals, warehouses and even timber forests.

Publicly traded REITs let investors own shares, allowing them to tap the companies' real estate portfolio for income. They have been particularly popular in Asia, and now make up more than 70 per cent of all initial public offerings (IPOs) in the real estate industry, according to an assessment by Ernst & Young the financial advisory firm.

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"It can channel personal savings and private capital into infrastructure projects," said Stanley Ching, senior managing director at alternative investment manager Citic Capital. "What's more important is that it will not overstretch already debt-laden local governments."

Singapore is Asia's REIT trading hub, with 41 IPOs by the investment trusts since 2002, while Hong Kong has 11. Some of Singapore's biggest REITs include the city's major shopping centre landlord Mapletree Commercial Trust, and Capitaland Mall Trust. Link Reit, the biggest in Hong Kong, manages 126 suburban shopping centres and other properties, while the Fortune REIT, 27 per cent owned by tycoon Li Ka-shing's CK Asset Holdings, operates more than a dozen properties in the city.

"REITs will free up capital for reinvestment, increase direct financing, reduce corporate leverage, and will convert savings into investment capital in the long term," the Chinese regulators said in their statement.

Potential buyers behind a scale model of Forest City residences in the state of Johor, Malaysia, on 25 March 2018. Photo: EPA-EFE alt=Potential buyers behind a scale model of Forest City residences in the state of Johor, Malaysia, on 25 March 2018. Photo: EPA-EFE

The market for China's REITs could be worth between US$566 billion and US$1.7 trillion, bigger than American REITs, according to a 2019 estimate by Zhang at Peking University.

Their development had been hampered by regulatory and tax hurdles, which have limited the industry to the private sale of quasi-REITs, much like debt products, he said.

"It is imperative to launch REITs," Zhang said. "The pandemic outbreak has damaged the country's economic development, and SME financials, resulting in soaring unemployment. We need the correct measures to boost the economy and REITs is it."

China's pilot programme appears to put the priority on capital-intensive infrastructure projects with long payback periods, eschewing the more typical shopping centres, offices, hotels and rental homes. Warehouses, tolled motorways, airports, industrial estates, urban utilities, sewage and garbage processing facilities, information networks and other types of property in strategic and emerging industries will be selected to test the water, according to the regulators.

"Traditionally speaking, shopping centres and offices are important components of REITs in other markets, for example Hong Kong and Singapore," said Citic Capital's executive director Sunny Zhang Ping. "In the future, we will see further expansion of the properties that can be included in the publicly traded REIT product."

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2020 South China Morning Post Publishers Ltd. All rights reserved.

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