Pilot reits expected to take froth off rising real estate prices

HONG KONG: In the latest salvo aimed at the mainland property market, the country 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 could be launched by the second half with the first offerings limited to domestic investors and traded on the interbank market - unlike other typically listed reits in markets such as Australia, Singapore and Hong Kong.

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 the first quarter, commercial property transactions in the country totalled US$25 billion, making up  65 per cent 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," Alan Chiang, an analyst at DTZ, said.

"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 the mainland 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.

The first unlisted investment trusts, likely to be in Beijing, Shanghai or Tianjin, will pave the way for the country 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," said J&J Asset Management chairman Li Xiaodong.

In the second half, 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 mainland reits, so long as yields are higher than government bonds. It's got to be around 5 to 6 per cent before it interests us," Zheng Weigang, the head of investment at Shanghai  Securities, said.

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

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 per cent to 10 per cent range, much higher than yields of government bonds.

Reits in Japan and Singapore offer dividend yields that are 5 percentage points higher than 10-year government bonds. In Hong Kong, Champion Reit gave a dividend yield of 7.93 per cent last year, much higher than blue-chip developer Cheung Kong's 2.7 per cent.-- Reuters