Reits offer new finance source in China

As companies across Asia struggle to refinance, China has come up with a novel solution. The government will allow Real Estate Investment Trusts (Reits) to set up in the country, providing struggling property companies with a new potential source of cash.

Last month, Caijing reported that the State Council had approved plans for a Reits framework in the PRC. The China Securities Regulatory Commission (CSRC) and China Banking Regulatory Commission (CBRC) are now discussing appropriate rules and structures, but no deadline for the guidelines has been set.

Angela Lee is a Reits specialist at Baker & McKenzie's Hong Kong office: “With a Reit, a property developer can divest its commercial rental real estate and have the Reit listed as a yield-bearing instrument. This is then tradable on a stock exchange, and the capital realised from its sale can be reinvested in land development.”

Details of the Chinese regime have not been confirmed. But in 2004, the government consulted with the industry on (shelved) proposals to establish Reits. These proposals provide some clues, and some concerns, about the future framework.

The 2004 framework allowed Reit investment in land development as well as real estate which, if part of the new plans, could limit the appeal of Reits. Land development is more vulnerable to market volatility than developed real estate, affecting a trust's potential yield.

Tax issues, which were also passed over in the 2004 consultation, could also reduce the appeal for property companies. If the government does not offer concessions and limit double taxation, the cost of setting up a Reit could be prohibitive.

And foreign investors might find their role limited. No Foreign Investment Corporation (Fic) has been allowed to list since 1999; without more detailed guidelines, there are fears that the government will take a similar approach to Reits controlled by a Fic.

“Foreign involvement will probably be allowed but limited to being cornerstone investors taking a minority stake, or participating in management, provided foreign investors do not have control,” said Lee.

Despite the lack of details about the breadth of the Reit framework and its restrictions, guidelines could be released before the end of the year, or shortly after.

“If the central government wants to, it can do this quickly,” said Lee. “It need not worry about the regulation not addressing everything as the floodgates are not going to open. The authorities will still have the last say on which Reits are approved.”

This article appears courtesy of International Financial Law Review. Please visit www.iflr.com