CHINA -Chinese Real Estate Investment Trusts (REITs) could play a vital part in helping the country's real estate markets recover from the economic crisis, according to the Asian Public Real Estate Association (APREA).
The ongoing financial crisis and limited bank lending in China has caused the Chinese property market to soften considerably, but the introduction of REITs could help boost liquidity into the property market and make it more transparent, suggested Peter Mitchell, chief executive officer (CEO) of APREA, the Asian division of the real estate representative body.
"With the real estate market having gone quickly into the doldrums somewhat in the last few months, the government is looking at a REIT system as being an important part of attracting new capital into the market," he said.
According to Mitchell, there are parallels between China's current real estate market and the Australian and American markets in the early 1990s, when governments were looking for ways of "broadening and deepening" the capital base and providing alternative sources of capital to reduce the reliance on bank debt in real estate.
The development of REITs in Australia, the US and Singapore suggested it is often an economic driver which leads to the development the most successful REIT markets, according to Mitchell.
"This now seems to be the imperative in China in that they need alternative sources of capital to get into the real estate market and assist its recovery. That's one of the benefits that REITs would bring. REITs would also bring greater transparency and confidence. They also tend to act as price stabilisers," he told IPE Real Estate.
The Chinese government has been mulling over the idea of introducing REITs for the last few years. Chinese authorities announced plans in late 2007 to run a REIT pilot scheme the end of 2008 or early 2009, and then revealed proposals last November to launch a national REIT regulation should the pilot scheme be successful.
The Shenzen stock exchange also recently said it was considering its own version of REITs.
It is understood Chinese government officials had, until now, thought retail investors would make up a large part of the investor base for REITs in China, so institutional investors would be mainly domestic rather than foreign - a view which might limit REITS' success.
"With the market having softened there it is then much more important to ensure that Chinese REITs are successful. And if REITs are to fulfil the objective of attracting capital back into the real estate market it really doesn't make any sense to exclude foreign investors from participating in those REITs," said Mitchell.
The general infrastructure for a REIT market must be tweaked before there is widespread foreign institutional and pension fund interest.
"There are a number of supporting things that need to be in place to make investors feel comfortable, things such as acceptable valuation standards, transaction transparency and quality of management; the single most important criterion for investors," he said.
China also needs to consider implementing a better fund management profession and educate local retail and institutional investors as to how REITs will work in order to attract investor interest, according to Mitchell.
"It's something that was not done comprehensively in Singapore and Hong Kong and a number of our members have commented that more work on investor education needs to be done in both of those economies. The Chinese authorities are on to this as being one of their main challenges," he said.
The REIT pilot scheme is due to begin in the next coming months.
APREA represents the listed real estate sector in Asia Pacific and aims to promote the region to domestic and foreign investors and improve the commercial operating environment for its members.
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