Prospective homebuyers look at a residential property project model at a real estate exhibition in Beijing. (Photo provided to China Daily)
Stepping up efforts to establish China's real estate investment trusts, or REITs, may be one of the fundamental solutions to rising financial risks of the real estate sector, policy advisers and experts said.
"It is imperative to develop a publicly offered REITs market," said Xiao Gang, former chairman of the China Securities Regulatory Commission, the top securities watchdog, and a national political adviser.
REITs could not only inject new economic growth momentum but help smooth out price fluctuations in the real estate market and improve financial market stability, Xiao said at the China REITs Forum 2019, held in Beijing in June.
REIT is similar to a mutual fund. In a mutual fund, a fund manager uses money collected from investors to buy securities. In a REIT, the manager uses the combined investment money to purchase real estate properties that generate rental income, like office buildings, apartment complexes, shopping malls and warehouses.
The rental income is then distributed to investors, and investors can sell or trade publicly offered REITs easily as they are listed on exchanges.
As a real estate asset securitization vehicle, REITs were introduced in the United States in 1960s, while products qualified as publicly offered REITs by international standards have not yet appeared in mainland markets.
But experts increasingly expect that a domestic REITs market is on the horizon, to meet the need of risk prevention and high-quality development of property firms.
REITs could help reduce property price fluctuations partly as they acquire properties whose prices are down and sell those whose prices are up, to maximize returns, according to Xiao.
Also, REITs provide the public with a new investment channel that can strike a balance between safety and profitability, helping reduce individual investment in the housing market and prevent a price bubble from building or bursting, Xiao said.
This could go a long way toward preventing financial risks as fluctuations of property prices would undermine sales and therefore solvency of property firms, and even cause individuals to stop repaying mortgages. Such market dynamics could threaten the stability of the banking system.
By improving liquidity and widening fund resources of the property market, REITs could help resolve financial risks by trimming leverage levels of property firms, said Chen Qianghua, management partner of global property investment fund of funds at Beijing-based Credit-Ease Wealth Management.
According to Chen, the domestic market has satisfied most of the preconditions of establishing a REITs market, except a favorable policy and tax framework.
In January, the Shanghai Stock Exchange said it will push ahead pilots of publicly offered REITs this year. The Shenzhen Stock Exchange also pledged to step up efforts to roll out rules and pilots of publicly offered REITs.
As policy support strengthens, this year could well see the debut of China's publicly offered REITs market, said a report from Huatai Securities.
REITs pilots may first be launched in the Xiongan New Area, Hainan province and the four first-tier cities, namely Beijing, Shanghai, Guangzhou and Shenzhen, with apartments with long leases and infrastructure as the underlying assets, the report said.