China REITs a step closer

The Chinese government has drafted long-anticipated regulations permitting the formation of the country’s real estate investment trust (REIT) sector.

Government regulatory bodies, including the China Securities Regulatory Commission (CSRC), completed feasibility studies on the regulations in the past two weeks, and completed the draft for internal circulation over the past few days, according to Joel Rothstein, partner at law firm Paul Hastings. It is understood that the draft could be released for public comment any day now.

Real estate investors in China have anticipated the establishment of REITs in the country for years, and have hoped that the increased liquidity they offer would encourage growth. “The potential for growth after China [finalizes] the REIT regulations is phenomenal,” said Peter Mitchell, the Asia Pacific Real Estate Association chief executive.

Despite that optimism, Rothstein is concerned this first set of regulations may be more of a pilot program with numerous limitations and oversight for REIT managers to adhere to. 

“If REITs are overly regulated, they will have limited impact,” said Rothstein. Although there is much interest in the REIT structure, excessive control could hold the market back for another few years, he said.

And one of the primary limitations will be on foreign investment into the REITs. Foreign investors would be able to sell to the listed trusts, and could perhaps form joint ventures with them for projects in China, but would not be allowed in invest directly in REITs because China’s foreign investment regime would still apply. Rothstein said he understood there to be no discussion of removing that barrier to foreign entry. 

The regulations have been a long time coming mostly because of an ongoing debate between China’s many regulatory bodies about what form REITs should take legally and which different regulatory bodies would have oversight of them. Although not decided,  Rothstein predicted the CSRC is set to be the REIT regulator.

“I can definitely see foreign investors using REITs as a method of exiting their projects,” Rothstein said. Currently, China’s private trusts have been regarded as one exit route for private equity real estate funds to sell their properties. These relatively opaque entities, often described as China’s shadow banks, have bought billions of yuan of properties over the years.

REITs are expected to offer more transparency than China’s trusts, according to one global real estate fund manager – and he said it is just one more step in the sophistication of both the real estate market and the capital markets that function within it.