Hurdles remain to establishing REITs China's property market

 

20 10월, 15:24www.wantchinatimes.com

China began its trial run for the much-discussed real estate investment trusts (REIT) in 2004, but the unfortunate combination of the 2008 financial crisis and measures enacted to deal with it, among other factors, have put the development of these new financial products in a state of limbo.

 

 This year's introduction of credit asset securitization in select trial markets rekindled interest in REITs. Switzerland-based UBS has supercharged that enthusiasm with a recent offering of real estate funds that closely resemble REITs. But they still face myriad challenges in the country's regulatory system.

 

 It is no coincidence that the keen interest comes hand-in-hand with the need for new ways of financing real estate. Property investors are running into obstacles as regulatory restrictions continue to pile up, making REITs a tool in the eyes of investors that can overcome sometimes contradictory regulations by linking market capital to real estate.

 

 To make that happen, the first obstacle that needs to be overcome is figuring out the regulatory agencies and investment strategies.

 

 The most likely regulators are the Banking Regulatory Commission, which is legally responsible for granting permission to issuing entities; the People's Bank of China, which is responsible for trading in the national bonds market; and the Securities Regulatory Commission, which oversees trading at securities exchanges.

 

 China's REITs should focus on stable revenues and the long-term management of personal or commercial properties. Investment amounts can be set to a minimum of half of a commercial property's total asset value to ensure commitment to a specific investment goal, and REITs should be blocked from taking part in early-stage development projects. Any low-interest loans taken from financial institutions should require a report to show what percentage of total assets the loans make up.

 

 Yet four major external obstacles remain to introducing REITs inside China.

 

 The first is tax. With no tax code governing REITs, they could be subject to repeat taxation from overlapping regulations, including taxes for land appreciation, corporate income, and deeds. Legal ambiguity means property would have to be transferred multiple times, incurring heavy tax burdens that will make REITs less appealing.

 

 Another major problem is the incomprehensiveness of a domestic real estate registration system. Trust funds are required under the law to register their holdings or risk having them invalidated, yet the process for doing so remains unclear. Localized registration system's, like Shanghai's, do not extend to a national scale.

 

 The third roadblock is the bankruptcy-remote system, a common concern across the credit asset securitization sector. By nature, REITs must have special purpose vehicle subsidiaries to keep assets secure should the parent organization go bankrupt. There is not yet a legal safety net in place, however, to ensure the protection of SPVs.

 

 Lastly, the lack of a unified trade platform to meet the needs of REITs means they will face liquidity risks.

 

 In the face of these various problems, REITs would benefit from following the example set by UBS: shifting to a fund model. once external factors meet the requirements, these funds can then transform into full-fledged REITs.

 

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