China poised for launch of first reit

Prototype product from Citic Securities, expected to raise billions of yuan on Shenzhen exchange, follows years of caution by Beijing

PUBLISHED : Wednesday, 09 April, 2014, 1:40am
UPDATED : Wednesday, 09 April, 2014, 1:40am

Beijing has taken a substantial step towards enabling a mainland real estate investment trust (reit), with Citic Securities about to launch a prototype product.

The mainland's largest brokerage is expected to raise billions of yuan in funds through a private offering of a reit, to be listed on the Shenzhen Stock Exchange's block trading system.

Investors will be paid dividends from rents earned by the underlying properties - two office buildings owned by Citic.

According to a Citic document, the two properties - one in Beijing and the other in Shenzhen - are worth a combined 5 billion yuan (HK$6.2 billion) and have 100 per cent occupancy rates.

It is a good financing channel for developers that also helps to diversify risks

The China Securities Regulatory Commission (CSRC) approved the sale of the reit product in January, the brokerage said.

Beijing has been preparing to launch reits on the mainland for nearly a decade, in order to offer additional financing channels to real estate developers.

The long delay has been due to the central government's crackdown on the property market to rein in soaring property prices.

Sources close to the CSRC said a successful sale and listing of the Citic reit would not necessarily lead to a drastic liberalisation in the near future. "You have to be politically correct in China," one source said. "But the market is badly in need of reit products."

The Citic product is not the same as the reits traded on overseas markets, which are sold through public offerings and are publicly traded.

China's first exposure to reits began in 2005 when the Hong Kong-listed GZI reit became the first to include assets based on the mainland.

Since then, a number of reits, primarily listed in Hong Kong and Singapore, have acquired assets on the mainland.

But the mainland interbank market and the exchanges have yet to see a reit listed, with the securities and banking regulators having to comply with the leadership's desire to put a damper on the red-hot property market.

A number of developers and researchers have been lobbying for the early launch of mainland reits after Beijing announced plans to build millions of low-cost apartments for the underprivileged.

Such housing projects could face funding difficulties and reits could help developers fund them.

It is believed that reits could help raise several hundred billion yuan for low-cost housing developments.

In 2012, Tianjin launched a reit-style product backed by rent income from low-cost homes, but the fund could not be traded publicly.

"It is a good financing channel for developers that also helps to diversify risks," said Z-Ben Advisors' head of research Howhow Zhang.

"But investors and developers have to be patient now that the central government is still taking a harsh stance on the property sector."

Shanghai announced in 2009 that it would launch a reit product that year as part of its ambitions of becoming an international financial centre, but it never eventuated.