Special considerations for designing pilot REITs in China
| Date | 06 March 2009 |
| DOI | https://doi.org/10.1108/14635780910937845 |
| Pages | 140-161 |
| Published date | 06 March 2009 |
| Author | Hong Wang,Yining Sun,Yin Chen |
| Subject Matter | Property management & built environment |
Special considerations for
designing pilot REITs in China
Hong Wang and Yining Sun
School of Economics and Management, Tsinghua University,
Beijing, China, and
Yin Chen
Beijing Grand Consulting Co. Ltd, Beijing, China
Abstract
Purpose – The purpose of this paper is to propose advice on the design of pilot real estate investment
trusts (REITs) and the future development of a REITs market in China.
Design/methodology/approach – This study presents a qualitative analysis on unique attributes
of the Chinese market. Taking those attributes into account, it goes onto offer suggestions and ideas on
how China can most successfully kick off its REITs industry.
Findings – The paper finds that REITs offer developers an alternative, less risky way to raise
money. They would also provide owners with an exit strategy. REITs implementation should be a
two-stage process. Pilot REITs should be made available to institutional investors first and later to
retail investors. Most importantly, current legislation and taxes do not provide an environment
conducive to REITs. The paper also finds that it is presently a favorable market environment under
which to launch REITs, owing to pent up demand for REITs amongst investors.
Practical implications – The greatest practical implications of this study are the suggestions
offered in terms of what Chinese pilot and long-term REITs should look like. Pilot REITs can be
implemented using special regulations. For post-pilot REITs, currently existing Chinese trust schemes
and special asset management plans offer possible, but problematic, frameworks. Perhaps more
promising is the possibility of legislation modeled after China’s current securities fund law. This paper
implies that new regulations and laws are needed before REITs can be launched in China, as well as
gives advice as to what those laws should look like.
Research limitations/implications – Thereare no REITs yet in China, so a trenchant quantitative
study is impossible. This paper is a preliminary work to be followed by a quantitative analysis once
China REITs have been operating for long enough to offer sufficient data.
Originality/value – This is one of the only papers examining China pilot REITs in the context of
China’s economic, legal, and tax environment. It takes previous studies a step further by offering
specific legal, regulatory, and tax frameworks that would aid the development of China REITs.
Keywords China, Diversification, Property finance,Securities, Real estate, Investment
Paper type Research paper
1. Introduction
This paper reviews the current status of China’s economy and real estate market, as
well as addresses the incentives for and barriers to developing a real esta te investment
trusts (REITs) market in China. The paper recognizes that to implement REITs all at
once would be a drastic shift, and so the government will most probably introduce
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1463-578X.htm
The authors wish to thank Matthew Lowenstein for his contribution to the English language
improvement of this paper.
JPIF
27,2
140
Received March 2008
Accepted November 2008
Journal of Property Investment &
Finance
Vol. 27 No. 2, 2009
pp. 140-161
qEmerald Group Publishing Limited
1463-578X
DOI 10.1108/14635780910937845
REITs in stages. While it is possible that the government will begin introducing REITs
to China by passing new laws under which REITs could exist, it is more likely that the
first stage will consist of pilot REITs restricted to institutional investors. This is more
consistent with China’s record of favoring gradual reform over sudden change. When
China REITs have become more mature, then they will be allowed to go public.
It should be notedthat this paper not only seeks to draft a comprehensiveprogram for
kicking off the Chinese REITs market, but also takes into consideration government
policy, legal issues and the state of professionalism in Chinese real estate. The topic is a
close follow-up to the research done by the China Securities Regulatory Commission
(CSRC) and other related authorities, andhas significant practical value at present when
there are considerable incentives for developing a REITs market in China. In section 2,
the paper offers a background summarizing the basic function and history of REITs.
This section also touches on the incentives todevelop a Chinese REITs market, such as
their ability to spread out both profits and losses of revenue-generating property. The
paper then reviews the relevant academic literature. In section 4 it examines the
idiosyncrasies ofthe Chinese economic and legal situation andhow these idiosyncrasies
may impact the development of a domestic REITs market. This section includes
explanations of how REITs will make Chinese real estate more efficient and less risky,
such as their ability to hold and maintain high-quality real estate assets and to provide
owners of income-producing properties with less risky financing. Sections 5 and 6
formulate designsfor pilot REITs in China. The paperthen goes on to draw conclusions.
2. Background
A REIT is a corporation or trust that uses the pooled capital of many investors to
purchase and manage property and receive its income (equity REIT) or, less
commonly, mortgage loans (mortgage REIT). REITs are by and large traded on major
exchanges like any other stock. They are usually granted special tax status. REITs
offer several benefits over direct ownership of properties. They are highly liquid,
unlike traditional real estate. REITs enable sharing in income-producing, usually
non-residential properties such as hotels, malls, and other commercial or industrial
properties. Furthermore, there is no minimum investment in a REIT allowing
small-scale retail investors to participate. Also, REITs pay yields in the form of
dividends no matter how their shares perform.
Since the advent of REITs in the USA in 1960 and Australia in 1971, the
capitalization of the REIT market has grown rapidly. According to a prediction by
UBS, the Asian ex-Japan REIT market will have a market cap of $100 billion by 2010.
The major REIT markets in Asia will then encounter fierce competition. Multinational
REITs are the trend and there are already cases of investment in Chinese properties by
Hong Kong and Singapore listed REITs. (See Table I for a comparison between
possible Chinese pilot REITs and international REITs.)
In China a huge pool of quality real estate is currently held by developers,
commercial banks and government. A study by Pramerica Real Estate Investors
ranked China ninth out of the top-16 countries in terms of size of real estate portfolio
with a pool of US$240.5 billion of higher grade commercial real estate as of year-end
2003. The desire on the part of the aforementioned property owners to unlock the
potential values of their properties will provide a strong pipeline of real estate assets
that can be injected into REITs.
Designing pilot
REITs in China
141
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