— This is the script of CNBC's news report for China's CCTV on May 18, Monday.
Welcome to CNBC Business Daily. I'm Qian Chen.
The REIT concept was introduced in 1960 in the United States, and its popularity took off in the 1990s. Modeled after mutual funds, REITs allow investors to buy into a company owning a portfolio of properties without having to buy or finance the property.
Equity REITs constitute the bulk of today's REIT market. Stock exchange-listed Equity REITs account for 70 percent of all U.S. listed REIT assets, and 90 percent of the approximately $700 billion equity market capitalization of the listed REIT marketplace is represented by Equity REITs. There are approximately 150 listed Equity REITs, almost all of which are traded on the New York Stock Exchange.
REITs can be publicly or privately traded, and to qualify for tax-free (pass-through) status at the trust level, must pay more than 90 percent of their cash flow to shareholders.
In this way, REITs are considered high-yield investments rather than high-growth. With much of the cash flow passed onto shareholders, the share price of REITs is expected to remain stable or appreciate gradually along with underlying real estate assets.
Listed Equity REITs own more than $1 trillion of real estate assets in the U.S.. The assets of Equity REITs account for an estimated 15 percent of total U.S. commercial real estate assets, and Equity REITs directly or indirectly support some 1 million U.S jobs.
The China Securities Regulatory Commission is reviewing the issuance of Penghua Qianhai Vanke REIT, a domestic real estate investment trust (REIT). The REIT is issued by Vanke Co., the country's biggest residential real estate developer, and if approved, will become the first publicly traded onshore REIT in China.
Along with easing monetary and regulatory policy, the Chinese regime is viewing REITs as a way to stabilize the real estate sector.
The last decade's boom in commercial and residential construction has saddled developers and banks with excess debt, which the state is now looking to rein in without damaging economic growth. REITs will offer a new source of funding to ease reliance on the unregulated shadow banking and trust financing sectors.
[Peter Verwer, Asia Pacific Real Estate Assocation, CEO] "The Chinese economy is going to take US economy in a few years. Some people say already has, but there's 1/5 of investable stocks in China, of that in the US. But the key thing is growth. There's currently about 3 trillion dollars worth of investment grade stock in China. That's expected to double in less than 5 years, then be around 9 trillion US(dollars) within a decade."
Last April, CITIC Securities Co. Ltd., China's largest domestic brokerage house, launched a REIT only for institutional investors on the Shenzhen Stock Exchange. Dalian Wanda Group, the developer controlled by Chinese billionaire Wang Jianlin, is launching a REIT-like wealth management product to finance its Wanda Plaza shopping malls.
To create real estate liquidity, China is looking at a two-pronged approach: rate cuts and relaxing regulatory oversight to help banks roll over debt, and allowing new products (such as REITs) to give developers easier access to financing.
Some of the changes will reverse restrictions placed after the financial crisis and exacerbate China's current debt problem.
[Peter Verwer, Asia Pacific Real Estate Assocation, CEO] "That's the beauty of REITs. What they are providing is more options for both institutional investors and ultimately, for moms and dads. One of the issues in China is that big development companies are very much balance sheet heavy. And what REIT does is to allow them to diversify and find partners, particularly patient capital, which will take assets off from their balance sheets, especially for some companies which rotate into offices, shopping centers. and hotels. And this will be a benefit to them."
While the market may yearn for REITs, a host of legal and tax issues stand in the way.
While Chinese REITs seem lucrative in theory, it remains to be seen how sound they are as investment instruments. Rental yields outside of the biggest cities remain low, and there are unresolved tax issues for both trusts and investors. To date, no official timetable has been released for issuing Chinese REITs.
CNBC's Qian Chen, reporting from Singapore.