China's First Rental Housing REIT Could Prove Model For Future

     BEIJING (MNI) - The Chinese government has approved the nation's first-ever

real estate investment trust (REIT) amid its campaign to boost the domestic

rental housing market, China media reported. 

     The government approved the plan Monday during the 19th Communist Party

National Congress. The CNY5 billion REIT will be managed by the rental housing

division of listed property developer Poly Real Estate Group, a central

state-owned enterprise (SOE). The approval was hailed by Beijing Business Today

as "meaning securitization of the rental housing market has entered a new

chapter" by allowing individual and institutional investors to participate

indirectly in the domestic property market of the world's second-largest

economy.

     "From a macroeconomic viewpoint, such pilot programs lay the foundation for

the government to create product standards for REITs and related products," Yan

Yuejin, director of the research department at E-house Real Estate Research

Institute, said in an interview with MNI on Tuesday.

     REITs -- real estate-focused investment vehicles similar to mutual funds --

gather investment capital from individual investors and financial institutions

to invest in a variety of real estate projects. The investors receive returns

based on the net profits generated by the trust investments. 

     China has never had a true REIT due to the lack of an approved investment

fund framework and underdevelopment of the connection between the real estate

and capital markets, although China has experimented with so-called quasi-REITs

-- trusts that do not meet all the standards of the Western version of the

investment vehicle -- for a number of years. Rental housing development

companies are eager for new funding channels, and individual investors want new

investment vehicles in which to place the money they have accumulated from

China's economic boom over the past several decades.

     "This kind of financial product will help money to get to property

developers faster, especially in the rental housing market," Yan told MNI.

Property companies still have many concerns about investing in the rental

housing market, even with the government's encouragement, because returns are

not high and cash flows usually take much longer than with housing sales, he

said.

     The first rental housing fund was approved on Oct. 11, but with little

reaction. That is partly because the fund was a quasi-REIT managed by a private

property company focused on long-term rentals, while Poly is a large, well-known

state-backed property developer listed on the Shanghai stock market.

     The Chinese government has signaled in the past few months that state-owned

companies would lead its high-priority campaign to significantly increase rental

housing in coming years.

     The Poly REIT model "represents an example for large-scale Chinese property

companies on how to best utilize the assets they own," Che Yang, an expert on

REITs who works for a private equity fund, told MNI. "It means all property

companies could soon establish such investment trusts." 

     However, Che argued that the Poly REIT product may not be a true REIT by

Western standards.

     "We cannot say it's a real REIT because real REITs can be publicly funded"

while the Poly REIT cannot, Che told MNI. "It's almost the same as a

quasi-REIT."

     Che said establishing REITs as funding vehicles is the clear direction of

the real estate market. Both government policy guidance and the market are

pushing toward creating true REITs, he said, noting property developers now

often talk about REITs in discussions with each other.

     Yan said REITs may help reduce speculation in the property sector, as

individuals could invest in property projects via REITs rather than purchase

housing units directly to hedge against price gains in the future. Che agreed

REITS could contribute to reducing speculation to some extent but noted that

REIT purchasers may mainly be banks that invest via off-balance-sheet methods,

so REITs may not do much to control risk in the real estate or financial

sectors.

     Analysts expect the Chinese government to set out guidelines for creating

true REITs by the end of this year or early next year.

--MNI Beijing Bureau; +86 (10) 8532-5998; email: iris.ouyang@marketnews.com

--MNI BEIJING Bureau; +1 202-371-2121; email: john.carter@mni-news.com

--MNI Beijing Bureau; +86 (10) 8532-5998; email: vince.morkri@marketnews.com

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