Could a simple change of name get real estate investment trusts off the ground in China?
Many Chinese officials have resisted calls for Reits, seeing them as just another source of funds for irresponsible developers whose borrowing has fuelled the property bubble
When China’s most famous philosopher, Confucius, said “If the name is not correct, the words will not ring true”, he probably wasn’t thinking about property investment schemes.
But his ancient words of wisdom could easily sum up an argument being put forward by advocates of real estate investment trusts (Reits) who believe their near-total absence in China may boil down to one simple thing: the name.
“So far, China hasn’t produced a real Reit, just quasi-reits. Why? For a long time, the Chinese translation has been incorrect, and our understanding of Reit is too narrowly defined. As long as Reit is mentioned we think of financing to developers. We have failed to see the full function of Reits,” Hong Lei, chairman of Asset Management Association of China (AMAC), told a Reits forum at Peking University on Tuesday.
The “real estate” part of Reit has long been translated into the Chinese term 房地產, which is more akin to “housing”, while AMAC and other industry bodies now encourage the translation to be “Fudosan” (不動產), the same term used in Japan. Fudosan calls to mind a much wider range of properties, anything from shopping malls, warehouses and factories to tollways, ports, pipelines and even vineyards.
The problem with 房地產 is that it tends to strike fear into the hearts of cabinet officials. They associate it with the kind of excessive borrowing by reckless developers that has inflated China’s housing bubble to its current bloated levels, and fear Reits would just hand them another financing channel with which to get around curbs.
Reits are a popular product across much of the world, and advocates have lobbied the Chinese government to embrace them for more than a decade, without success.
A Reit is a collective investment scheme that aims to deliver a regular return to participants through a portfolio of income-generating properties such as shopping malls, offices and hotels.
A source close to the China Securities Regulatory Commission told the Post the watchdog is actively pushing the State Council, China’s cabinet, to issue guidance for the establishment of publicly-listed Reits.
The push for Reits in China dates back to 2005, when the Yuexiu Reit became the first one listed on the Hong Kong stock exchange but underpinned by mainland properties. Since then no bona fide Reit has been listed in the mainland.
China’s massive build-up of local government debts handed Reits advocates an unparalleled opportunity to push their case. They were able to argue that they are the best way to introduce social capital to China’s massive infrastructure projects, freeing local governments from unbearable debt repayment burdens, especially after the public-private partnerships (PPP) promoted a few years ago proved to be not working.
UBS estimates that Chinese local governments’ direct and contingent liabilities had grown to 33 trillion yuan (US$5.2 trillion), or 45 per cent of gross domestic product, by 2016. Paying the interest alone would swallow up 90 per cent of newly-added GDP every year.
Local authorities have signed up to nearly 17 trillion yuan of PPP projects, but only half of them have actually been funded.
Yan Yunsong, an official with CSRC, in the forum cited Indian Prime Minister Narendra Modi’s infrastructure investment trust (InvIT) as an inspiration for China.
“Over 70 per cent of local government debts stem from infrastructure projects. By securitising the stockpile and allowing Reits to invest in them, governments could recoup cash in advance and invest in new projects,” said Meng Xiaosu, director of the Reit Centre, which falls under the jurisdiction of the Development Research Centre of the State Council.
Meng pitches the adoption of Reits to fund government projects as one of the most important steps in “supply-side reform”, a buzz phrase in China that refers to the elimination of excess capacity, and reducing debt levels.
Qian Xiaohong, chairman of Suzhou Industrial Park State-owned Assets Holdings Development, said her company yearns for the introduction of Reits, but not because it needs financing.
“We don’t lack money. We badly need to improve the operational efficiency of state assets. Reits could be a catalyst for that. This is why we don’t need debt-like Reit, but equity-like Reit,” she said.
The company in April sold 2 billion yuan of securities on the Shanghai Stock Exchange, whose underlying assets were community stores, service stations and other commercial outlets within Suzhou Industrial Park.
Reit advocates are also trying to persuade top officials to launch a publicly listed Reit on a pilot basis to invest in rental apartment complexes, or allow Reit management companies to register in Xiongan, the area outside Beijing hand-picked by President Xi Jinping to be developed into a new economic zone. Both rental housing and Xiongan are among Xi’s pet projects.
But the problem, according to industry insiders, is that the market for rental apartments is in its infancy in China, with yields very low in the biggest cities.
“From a purely market perspective, commercial real estate is the asset most suitable for Reit, but it is a bit difficult to persuade top leadership to open the gate. Rental housing is ‘politically correct’,” said Liu Qiao, dean of Guanghua School of Management, Peking University.
Though not ideal, proponents of Reits hope rental housing and the Xiongan scheme could be a starting point for public Reits in China. A white bill by Guanghua School has recommended Reits are introduced as pilot schemes, initially limited to a particular asset like rental housing, before being expanded to cover more assets. They called for specific guidelines on Reits to be rolled out as soon as possible.
Guanghua School hopes the first public Reit will be launched this year and could kick start a US$1.8 trillion yuan market that surpasses that of the US. An earlier report by the school estimated that if infrastructure projects were included, the size could be much bigger.