China adds REITs as way to cool property market

BEIJING/HONG KONG: In a latest salvo aimed at its property market, China is getting ready to launch a real estate investment tool that will give investors an alternative to bricks and mortar, and move to cool a market where prices have risen at the fastest pace in five years.

China's Real Estate Investment Trusts (REITs) could be launched by 2H with the first offerings limited to domestic investors and traded on the interbank market -- unlike other typically listed REITs in markets such as Australia and Singapore.

The launch of the pilot REITs comes as Beijing, determined to rein in frothy property prices, rolled out a slate of measures, warning banks against extending loans for property speculation, ordering local governments to act to control speculative buying and making it tougher for buyers to buy second homes.

In 1Q, commercial property transactions in China totalled US$25 billion (RM80 million), making up 65% of Asia's total, property services firm DTZ said in a report.

"The government is cautious about this and will only let institutional investors buy into REITs because, compared to the man in the street, they understand the product better and have better risk management," said Alan Chiang, an analyst at DTZ.

"But when retail and foreign investors are allowed in, they will have another way of investing in property, which will help put a cap on physical property prices."

Analysts say China's REIT market, when fully developed, will give developers an extra source of financing for more projects, boosting supply which should help temper overheated demand and redirect retail speculative buying from the physical market.

"There aren't many investment tools in China, where the savings rate is high. Insurance firms and individual Chinese hope to have more investment choices," said Yu Kam-hung, senior managing director at CB Richard Ellis in greater China. "REITs have proven a huge investment market, based on experience in the US and Australia."

The first unlisted investment trusts, likely to be in Beijing, Shanghai or Tianjin, will pave the way for China to launch listed REITs, valued at more than US$100 billion across Asia-Pacific, although the government first needs to settle thorny tax issues.

"That's nevertheless a good start, but what the market is really looking forward to is the next step -- when we can have REITs listed on the stock exchange," J&J Asset Management Chairman Li Xiaodong said at an industry conference in Beijing.

In 2H, Shanghai could be the first to roll out an unlisted REIT of state-backed government groups such as Waigaoqiao, Lujiazui, Jinqiao and Zhangjiang, which own office buildings and warehouses in free trade zones.

REITs are likely to appeal to institutional investors, such as insurers and banks, to diversify their portfolios and take advantage of good returns from a relatively safe investment product.

"We'll be quite keen to invest in (China) REITs, so long as yields are higher than government bonds. It's got to be around 5% to 6% before it interests us," said Zheng Weigang, head of investment at Shanghai Securities.

"The way we see REITs is a longer term investment, comparable to bonds, rather than property stocks, which can be quite volatile," Zheng said.

REITs invest in mainly commercial property and pay rent collected from their properties to shareholders as dividend. REIT investment returns in Asia are usually in a 5% to 10%, much higher than yields of government bonds.

REITs in Japan and Singapore offer dividend yields that are five percentage points higher than 10-year government bonds. In Hong Kong, Champion REIT gave a dividend yield of 7.93 percent last year, much higher than blue-chip developer Cheung Kong's 2.7%.

Relatively higher rental yields in China, due to lower commercial property prices compared with more developed markets in Asia, will also be a draw for investors.

Rental yields from Grade-A offices in Shanghai and Beijing are 7% to 8%, higher than those in Hong Kong and Singapore's 3% to 5%, industry executives said.

China's institutions have been keen to tap the fast-growing real estate market, especially insurers, which are banned from directly investing in real estate.

Ping An Insurance, the world's second-largest life insurer by market value, is investing billions of dollars in property projects via its trust unit.

For listed REITs, Beijing will need to decide whether to impose stamp duty and land appreciation taxes, analysts said.

"If you pay too much tax, it doesn't make sense; your returns will be smaller. Who will want to be involved in a vehicle if they have to pay a lot of taxes?" said Nancy Sun Marsh, a tax partner at Deloitte Beijing.

Global REITs were valued at US$568 billion at end-2009, with the US and Australia the top two markets, Ernst & Young said in March.

Based on Reuters' calculations from data at CB Richard Ellis, the Asia REIT market, which includes Australia and Japan, totalled about US$140 billion last year.

Analysts said it was too early to gauge the size of the Chinese market, especially before the introduction of listed REITs, but all agree the potential is huge. -- Reuters

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