Reit way for China would reduce cost for developers and offer investors more choice

Andrew Kam thinks the need to stem capital outflows and help some developers reduce their growing stockpile of unsold property should convince authorities to facilitate the launch of reits in China

PUBLISHED : Tuesday, 28 February, 2017, 6:20pm
UPDATED : Tuesday, 28 February, 2017, 6:20pm

Andrew Kam, 49, was a manager at the Hong Kong Urban Renewal Authority before he joined Savills in 2008.

He was promoted to valuation director in 2011 with his team serving a clutch of corporate clients including China Merchants Bank, Fuchun Group, HSBC, Bank of East Asia and Shanghai Forte Land.

What is the current status quo of the China’s reit market?

Prototype reits or reit-style investment products are popular in China. But they are different from reits in the West. Here, a reit is a fixed-income products and part of the credit system. In China, investors are paid dividends at a fixed rate from rents earned by the underlying properties. In the west, reits are an equity-based investment, sold through public offerings and publicly traded. More importantly, the high yields of reits are a reflection of their highly-skilled asset managers. Managers are supposed to better arrange the properties to enhance rental rates and occupancy ratios to maximise returns for reit buyers.

Is it urgent for China to give reits a full play in the property sector now that the government is focusing on reining in an overheated housing market?

Reits have been developing in China for two years and we have seen their rapid growth during this period. Before discussing the securitisation of the country’s property sector, it is necessary first to take a look at the macroeconomic situation. China’s foreign reserves recently fell to U$$3 trillion, which is widely deemed as a critical level. Shrinking foreign reserves have been weighing on the property market for a while. I assume capital outflows, rather than the yuan’s exchange rate, is a primary concern for regulators. So, it all comes down to the point of whether the onshore market has lucrative investment products to deter yuan assets from flowing abroad.

Could you give us a sense of how high is the financing costs faced by Chinese developers at present?

Currently, mainland developers raise money from debt sales that carry an interest rate of 3 to 7 per cent. Commercial lenders grant loans to them at a rate ranging from 6 to 13 per cent. They could be charged an interest rate of 20 per cent for fundraising via trust firms or through the shadow banking system. Generally speaking, Chinese developers also have a high debt-to-asset ratio of more than 70 per cent.

Who are the major investors in the reit-style products in China?

In China, the majority of reit investors are institutions at present. Indeed, the prototype products are designed for institutions, rather than retail investors.

What changes will take place if reits can effectively attract retail investors in China?

Chinese people have a penchant for property investment. We believe that buying interest in reits will increase amid the launch of real Western-style reits through public offering. Further liberalisation is necessary. The government has published a series of rules governing property lease and we will see a gradual process of creating a healthy market for reits.

Apart from commercial properties and office buildings, are there any other kind of properties in China that are suitable to be securitised as reits?

Properties related to tourism and health-care, industrial warehouses, and affordable homes built for underprivileged residents are assets that can be securitised to develop reits. We are bullish about China’s reits market since it will not only help developers raise funds, but give Chinese investors an access to products they desire for.

How do you gauge the demand from developers to launch reits?

Apparently, Chinese developers are saddled with high debt levels and lofty financing costs. In the commercial property segment, an oversupply of space is ratcheting up pressure on developers to reduce stockpile. In the past year, we saw an increasing number of reit-like products that reflected the high financing demand of developers and landlords.

What kind of return is generated by the existing prototype reits in China?

Outside China, a reit is supposed to target an annual return of at least 7 to 8 per cent. Based on our observations, the prototype reits in China aren’t able to match that rate and, to be frank, there’s a certain distance between the two.

What do you think is the biggest deterrent for reits to grow in China?

The market definitely expects an authentic reit based on public offering to debut. It will be of long-term benefit to the reit market if a product via public offering can be launched because that will attract more investors. The launch of real reits will mark a milestone in the country’s property and capital markets. The other sticking point is that capable managers are in high demand. Asset managers are required to do a lot of things, such as work out the renovation plans, attract tenants to enhance occupancy ratio and offer better properties that deserve higher rents. All in all, asset managers are much needed to create value for reits investors.