Chinese Reits on the horizon
A Chinese real estate investment trust market appears to have moved a step closer following comments by the general manager of the Shanghai Stock Exchange.
Zhu Congjiu, who was speaking at a conference in October, said the exchange was planning to launch some Reit products, commenting: "There is huge potential for Reits in a big and rapidly developing country like China." He did not specify a timeframe for their arrival.
A Reit market will be closely watched in China but few in the industry have expected it to appear soon, noting that China has numerous other priorities to deal with in the development of its capital markets, and that it has instead been focusing on cooling the Chinese real estate market. New measures to curb foreign investment in real estate came into effect on December 1, which seems to make it an unlikely time to launch a new market for listed property securities.
Peter Mitchell, chief executive of the Asia Pacific Real Estate Association, says his organization is represented on one of the two or three industry groups lobbying for the introduction of a national Reit law in China but "the groups are not connecting and so it would be fair to say that efforts to encourage the government are fragmented. It is therefore impossible to say when a national Reit law might be introduced."
But he adds: "China has a wonderful opportunity to develop something that is best practice, drawing on the best of existing models not just in Asia but elsewhere." He would like to see a model based on internal management of Reits, as is the case in the US and most European countries, as opposed to the external model commonly favoured in Asian markets. "Investors have overwhelmingly favoured the internal model," he says.
Zhu’s comments appear to suggest a local law for Shanghai rather than national legislation. But Mitchell argues this does not necessarily mean the development of a strong local market. "The development of a Reit market needs more than just a law," he says. "It needs a considerable supporting infrastructure to create investor certainty: tight regulation, transparent and acceptable valuation methods and investor protection, and general rule of law standards comparable to those that international institutional investors are accustomed to in mature Reit markets. If this infrastructure doesn’t exist then the characteristics that have made Reits so popular elsewhere – passive investment, low beta – will not exist."
When a market does arrive in a usable form, there will be some anxious glances from Hong Kong, which has failed to produce a strong local Reit market either in terms of the number of Reits or the performance of the handful of listed structures to date. "Clearly this development represents a threat to Hong Kong in the longer term," says Mitchell.