GLOBAL - Outbound real estate investment trusts look set to expand at a far quicker rate than their domestic counterparts in China.
This week, the China Securities Regulatory Commission approved a UBS SDIC product that will offer onshore Chinese investors access to REITs in the Asia-Pacific region.
This follows approval earlier in the summer for Lion's offshore REIT fund and a Penghua US REIT product. It is helping to expand the range of options available under China's Qualified Domestic Institutional Investor scheme.
But onshore, the China Banking Regulatory Commission recently announced stricter oversight for domestic REIT products, as the government seeks to cool property prices and reduce credit risks in the financial system, particularly those arising from the flow of capital away from the formal banking system.
Local governments have been ordered to monitor any real estate trust products that will mature within three months, and domestic banks must report any real estate business that continues to grow rapidly.
Joel Rothstein, a Beijing-based partner specialising in real estate and investment funds at Paul Hastings LLP, told IPE sister publication Investment & Pensions Asia: "CBRC has effectively limited another avenue that had opened up for domestic real estate investors. The expansion of REITs and other trust company products increase liquidity in the market and go counter to attempts to cool property prices and reduce property speculation."
Although they do not address the fundamental issue of local-level enforcement, the new regulations show regulatory scrutiny for trust products is increasing following a period of rapid and largely unfettered growth.
Negative real interests rates have driven investors away from the formal banking system, while property investment restrictions have deprived Chinese investors of a major preferred asset class. Trust companies have benefitted as an opaque mechanism for circumventing the tightening agenda.
According to CBRC-authorised data from the China Trustee Association, trust funds raised CNY3.7trn (€420m) in the second quarter this year, a rise of 14.5% quarter on quarter, approximately 17% of which went into real estate. Z-Ben Advisers estimate REIT assets under management increased 137.36% year on year in the first half of 2011.
"Trust companies are not transparent, so its hard to gain an understanding of their activities, but we do know a lot of money has been raised in the last several years through trust company vehicles for real estate," Rothstein said. "The trust companies are under-regulated compared to banks, and these regulations suggest the regulator is trying to rein them in."
REIT development in China faces more deep-rooted challenges, including an underdeveloped and confused regulatory regime, restrictions on participation and a lack of transparency.
REITs in China are not comparable in structure to their counterparts in other jurisdictions. Rather like 'RMB PE Funds', which are not independently managed pools of capital as understood elsewhere, the term is actually something of a misnomer.
Technically, Chinese REITs are often 'collective capital investment vehicle'' - generally limited to no more than 50 investors and operating in a similar way to club deals. There is no listing or trading of the interests in the secondary markets - REITs are not publicly listed and do not enjoy a special regulatory regime.
"In the legal field, we've been talking about the introduction of REITs in China for almost a decade, but there are still many challenges and obstacles that need to be overcome for the introduction of a widely accessible and useable REITs regime here," Rothstein said. "There has been a lot of interest, but without greater clarity and a unified regulatory framework, mass uptake of REITs seems unlikely."
For more on REITs in China, see IPA's full article here.
