Property financing

Strong demand for China's monetised products after Penghua Qianhai Vanke Reit

Penghua Reit, the first to receive mainland regulatory approval, plans to raise 3b yuan to invest in a Qianhai office project built by China Vanke

PUBLISHED : Wednesday, 15 July, 2015, 12:01am
UPDATED : Friday, 15 July, 2016, 10:32am

Strong investor response to the Penghua Qianhai Vanke Real Estate Investment Trust Mixed Mutual Fund will encourage more landlords and developers of mainland properties to introduce monetisation moves, say property analysts.

Penghua Reit, the first reit on the mainland, was approved by the China Securities Regulatory Commission on June 8.

The reit is targeting to raise three billion yuan (HK$3.8 billion) from institutional and retail investors and will list on the Shenzhen Stock Exchange after the offering period between June 26 and July 1.

The closed-end fund will invest half in an office project - Enterprise Dream Park in Qianhai - built by China Vanke, the country's top homebuilder. It will reap full rental income from the project from the start of the year to July 2023.

"China will continue to launch this kind of monetised product," said Derek Cheung, chief executive of New Century Asset Management, the manager of New Century Reit, the first China hotel reit.

"They have to," said Cheung, adding that mainland developers need a diversified source of funding from debt and that many Chinese developers wanted to monetise their commercial assets as an exit route.

But Cheung said the Penghua Reit did not resemble the typical reit structure by international standards.

"Unit holders of Penghua Reit do not have ownership of the property, it is more a kind of rental securitisation," he said.

According to Barclays, traditional reits have full ownership of underlying assets, but the Penghua product is backed by the operating rights rather than ownership.

After 10 years of operation, the project will be transferred from China Vanke to the Qianhai government for free. The fund will also be terminated in 10 years, says Barclays.

Some Chinese landlords appear to have progressed in launching quasi-reit products in the domestic market, according to Barclays.

As an example, it cited Wanda Group and 99 Bill jointly introducing China's first commercial property crowd-funding product, Stable Earner No1, to finance the construction of five Wanda Plaza projects.

Another example is Citic Securities, which launched two specific asset management plan products last year.

While none of these structures exactly resemble Hong Kong-listed reits, these innovative products do offer landlords alternative ways to cash in their investments in commercial properties, helping them realise their "light asset" strategies.

Analysts said these are still good examples of monetised products for the mainland market when China is not ready for a traditional reit since issues such as tax and dividend distribution have not been settled.

"The Penghua Reit demonstrates the Chinese government's continuing interest in encouraging an attractive equity product to help developers transition to a more asset-light balance sheet, diversify their sources of funding from debt, and meeting China's housing goals," said Peter Verwer, chief executive of the Asia Pacific Real Estate Association.

"The launching of Penghua Reit shows Chinese authorities are serious about exploring potential reit frameworks that suit the country's national development goals. It is also a further positive step towards developing a comprehensive reit model in China that will address taxation structures, gearing rules, distribution requirements and the role of sponsors," Verwer said.

"The potential for reits in China is huge, given the country's high urbanisation and mobility rates, which feed demand for increasing volumes of commercial, retail and industrial space as well as social infrastructure," he said.

Victor Yeung, managing partner of real estate fund management firm Admiral Investment, said if the central government wants a thriving reit sector, he would encourage a clear and "official" law to be passed as soon as possible.