Lawyers have been waiting for years for the Chinese authorities to enact a real estate investment trust and while it seems it would prove a popular move, the legislation may still be some time yet
It seemed only a matter of time before China got its first home-grown real estate investment trust (REIT). After all, next door in Hong Kong property investment is something of an obsession and, as long ago as last May, word was out that the China Securities Regulatory Commission (CSRC) had sent a delegation to Australia study property trusts, and was working with other authorities including the central bank to draw up legislation regulating PRC-based REITs.
But the Chinese authorities have still not introduced the legislation needed to make REITs a reality on the mainland and two proposed REIT pilot schemes formulated by the People's Bank of China (PBC) are not yet off the ground, causing some commentators to fear that China is still no closer to its first REIT.
Vivian Lam, a Hong Kong-based partner with international firm Paul Hastings, has recently advised RREEF China Commercial Trust, CapitaRetail China Trust Management and GZI REIT Asset Management on REITs with portfolios of PRC-based real estate assets to list in Asia. She is also involved in several other Hong Kong and PRC real estate-related REIT transactions and their proposed listings. Lam says it is only a matter of time before China gets its first REIT.
"REITs have already been endorsed at the highest level by the State Council," she says. "PBC and CSRC have spent a lot of time studying various proposals, so we are definitely going down that route. There was strong expectation that the pilot programs will be announced by second quarter this year, but the authorities may be spending more time fine-tuning the rules because they are keen to get this right and have something that works for the local market."
However, Hayden Flinn, a Hong Kong-based partner at Mallesons Stephen Jaques, says while it may look as though the Chinese Government will eventually go down that route, it is still difficult to judge exactly when it will become a reality. "They've been talking about it for several years now and nothing has come to market yet," he says.
Flinn says that for things to start moving, PRC's regulators will need to take the lead, adding that he has had plenty of interest from potential investors wanting to be part of REITs on the mainland. It is just that the interest has been spread over a number of years and it has actually been decreasing recently as international investors look towards markets that are perceived to be more stable. "Because of the global financial crisis, investors are now tending to look to more established markets," Flinn says. "Singapore, Hong Kong and Australia are seen as less risky because of more certainty over the legal framework in these jurisdictions."
Lam says she has had a lot of interest from investors, developers, local trust companies and fund management companies in mainland-based REITs. "We have given advice to some 'potential REITs' in structuring their proposed product," she says. "REITs represent a whole new exit for investors and developers, and intermediaries are also interested in getting into REITs management. But the entry barriers will be set quite high, at least initially, as regulators will probably allow a limited number of carefully vetted pilot projects out first to test the market, and develop the market in a gradual and controlled manner."
She sees the start date being pushed back because authorities are wary of adopting overseas models which may not suit the Chinese economic environment. "Politically, authorities in China are keen to avoid having REITs become speculative products. PBC, for example, has stated that China should avoid copying overseas REITs because some of them are too complicated and not right for China. If the authorities are successful in developing PRC REITs as safe, simple and transparent products, then it should appeal to many retail as well as institutional investors like insurance companies, and would be beneficial for the healthy and sustained growth of the Chinese REIT market," Lam says.
When - or if - the first REITs do appear, Flinn believes that their perceived success will have a massive impact on whether or not they become a fixture in the Chinese investment landscape. Like Lam, he notes that the Chinese authorities have been concerned about certain aspects in the way REITs have operated in other places (most notably in Hong Kong) - particularly in regard to their financial structure. That said, he sees no reason why REITs shouldn't take off in PRC in the medium to long term. "At the moment there's not a great deal of transaction volume globally and there's probably not the current interest in [PRC-based] REITs that there used to be," he says.
"But I see no reason in the medium to long term why REITs wouldn't be successful in China. In the short term though, everyone's struggling to predict what will happen, given current economic conditions."
By Ralph Grayden