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China could be close to creating a pipeline for property developers looking to unload assets or raise capital for new developments.
The China Securities Regulatory Commission is reviewing the issuance of Penghua Qianhai Vanke REIT, a domestic real estate investment trust (REIT). The REIT is issued by Vanke Co., the country's biggest residential real estate developer, and if approved, will become the first publicly traded onshore REIT in China.
Along with easing monetary and regulatory policy, the Chinese regime is viewing REITs as a way to stabilize the real estate sector.
The last decade's boom in commercial and residential construction has saddled developers and banks with excess debt, which the state is now looking to rein in without damaging economic growth. REITs will offer a new source of funding to ease reliance on the unregulated shadow banking and trust financing sectors.
China's real estate developers are starting to feel a liquidity pinch.
While Chinese REITs seem lucrative in theory, it remains to be seen how sound they are as investment instruments. Rental yields outside of the biggest cities remain low, and there are unresolved tax issues for both trusts and investors. To date, no official timetable has been released for issuing Chinese REITs.
The REIT concept was introduced in 1960 in the United States, and its popularity took off in the 1990s. Modeled after mutual funds, REITs allow investors to buy into a company owning a portfolio of properties without having to buy or finance the property.
REITs can be publicly or privately traded, and to qualify for tax-free (pass-through) status at the trust level, must pay more than 90 percent of their cash flow to shareholders.
In this way, REITs are considered high-yield investments rather than high-growth. With much of the cash flow passed onto shareholders, the share price of REITs is expected to remain stable or appreciate gradually along with underlying real estate assets.
China's Real Estate Quandary
In May 2014, China's State Council issued its "opinions to further promote the healthy development of the capital markets," which included REITs as an area of exploration.
This came during a time of contraction in China's real estate sector. The official index of housing prices for 70 cities across China shows that average new home prices dropped 6 percent in March 2015 compared to last year, the seventh consecutive monthly decline.
Developers are feeling the pinch too. Only 6 of the 20 largest real estate developers in China reported year-over-year contract sales growth during the first quarter, according to CRIC China, a consulting firm. The other 14 suffered an average decline of 15 percent.
To create real estate liquidity, China is looking at a two-pronged approach: rate cuts and relaxing regulatory oversight to help banks roll over debt, and allowing new products (such as REITs) to give developers easier access to financing.
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