China REIT Finds Rent Missing, Asks for Revaluation

Units in RREEF China Commercial Trust slid more than 12% on Tuesday after the property trust said it had asked for a new valuation of its Beijing office complex as it found that tenants were paying less rent than expected.

In a case that highlights the risks in China's booming but immature property market, the Hong Kong-listed real estate investment trust (REIT) said actual rents paid by tenants were lower than outlined in tenancy deals made with a former landlord.

The trust, managed by Deutsche Bank's property investment arm, RREEF, said the former landlord of its Beijing Gateway Plaza building, Tin Lik, had agreed to pay HK$278,526,708 (US$35.80 million) in compensation for the missing rent.

A spokesman for the company said the amount was equal to the shortfall for the remainder of tenancy agreements at the building, which was bought by the REIT and packaged into a June initial public offering.

"Mr Tin Lik has agreed to make further payment should that be necessary," RREEF China said in the statement. "Because of the payment, the manager considers that RREEF CCT will not suffer a shortfall of rental revenue by reason of the discrepancies identified." Tin Lik could not be immediately reached for comment.

RREEF China said it had asked consultants DTZ Debenham Tie Leung to carry out a new valuation for the office complex.

The trust was also investigating the rental shortfall, which the former landlord had attributed to "pre-leasing rental concessions to tenants" documented in agreements that had not been disclosed to the REIT manager.

RREEF China's units, which had been suspended since Sept.6, were trading at HK$3.96 on Tuesday morning, 23% below their IPO price, and giving a 2007 dividend yield of 8 percent.

Although China has not yet drawn up rules allowing REITs, two property trusts of only mainland Chinese assets are listed in Hong Kong -- RREEF China and GZI REIT -- and the CapitaRetail China Trust is listed in Singapore.

REITs, which pay most of their rental income as dividends, have caught on across Asia in the last five years because they give higher yields than bonds but tend to be less volatile than stocks.

Many investors are eager for China to pass REIT legislation to allow them to tap rental growth in a booming property market without having to buy a whole building. Because REIT units are traded, they are seen as less risky than direct investment.