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Timing is ripe for decades-in-the-making China REITs

Chinese regulators are reportedly in the process of giving approvals for some firms to test pilot REITs in China. Given the tightening credit conditions in the country right now, their swift introduction would be welcome news.

After the successful listing of a debut REIT in India in April, industry watchers are next switching their attention to China’s first REIT past the finishing line.

Last month, Grandjoy Holdings Group, a Shenzhen-based real estate development arm of the state-owned conglomerate China Oil & Foodstuffs Corporation (COFCO) was revealed to be among a group of firms tapped by the securities regulator to kick-off a pilot REIT in China, according to the South China Morning Post’s interview with Xu Hanping, Grandjoy’s chief financial officer. Grandjoy’s long-term partners include Singaporean sovereign wealth fund GIC and the Chinese insurer China Life Insurance, which have committed capital to the firm’s real estate funds investing in mixed-use projects and other repositioning assets in China.

Although the timeline remains unclear, the REIT would be the first open to institutional and retail investors to list on a Chinese stock exchange. This is not China’s first experiment with a REIT-like product, but industry observers hope it is the last and final attempt that results in a successful outcome. China’s credit squeeze, an ongoing deleveraging exercise over the past two years or so, coupled with government efforts to build a thriving rental housing sector, are push factors that should urge regulators to promptly create a functioning REIT code in China. Alongside asset sales, REITs will provide an additional liquidity provision tool for Chinese companies under pressure to scale back their towering debt piles. A REIT listing would be especially helpful for developers which do not want to sell a 100 percent interest in their assets to private real estate buyers, and instead want to retain part ownership and exit only a portion through a REIT to raise their returns on equity.

REITs in China, like in India, have been years in the making. Various versions of REITs have been introduced over the years as well, but these bear little resemblance to REITs in other developed markets. There are so-called quasi-REITs, more akin to a commercial mortgage backed security. Some of these REITs do not even trade and are held by a limited set of investors. According to JLL research, the first such quasi-REIT was the Auchan Tianjin No.1 Store Capital Trust Scheme, launched way back in 2003. CITIC Securities also launched a product called Qihang Specific Asset Management Plan in 2014, but that was reportedly only restricted to a few institutional investors on a special section of the Shenzhen Stock Exchange.

Even if a ‘conventional’ REIT does list in China, several challenges would still need to be addressed. A crucial one is around the layers of taxes a China REIT would be subject to. Industry observers are concerned the list of punitive taxes, including the value-added tax, land appreciation tax, income tax, and stamp duty, will make the net dividend yield unappetizing for real estate investors. Any investor looking to invest in a REIT would compare returns to those generated by other China focused REITs listed in Singapore or Hong Kong, or by selling in the private market. As Regina Lim, head of JLL’s Southeast Asia capital markets pointed out to PERE, a Singapore or a Hong Kong-listed REIT would generate a net yield between 6 to 8 percent, while selling an asset in China to another landlord would generate a 4 to 5 percent yield. The comparison gets tougher for foreign investors that would also factor in any potential losses arising from forex volatility.

It is anyone’s guess how long it could take for the REIT to debut in China. But, given the current environment, now would be a good time for an introduction.