REITs (real estate investment trusts), fast gaining popularity
in international markets, are making their way to Shanghai.
"The Shanghai Stock Exchange has already put in place a REIT
trading system, and will actively promote the products to be listed
on the bourse," Chen Zhizuo, SSE's supervisor for product
development, has said.
Trading will likely begin once draft regulations on REITs are
ratified by the government, said Charles Zhang, associate director
of Research and Consultancy at Colliers International Shanghai, a
real estate service provider.
REITs provide investors a way of buying shares in a real estate
portfolio from the stock exchange. They also offer real estate
developers and property holding companies a way of raising capital
directly from the market without having to go through the costly
IPO process.
But there are several hurdles to overcome before a healthy REIT
market can be established in Shanghai, property agents and
investment analysts have said.
"The current Chinese investment market is not mature enough to
introduce REITs, which require specific laws and regulations to
ensure proper and healthy operation," said Zhang.
"No existing investment laws are applicable to REITs, and this
is the major obstacle China must face before launching REITs,"
Zhang added.
Ren Zhuang, a real estate analyst from Industrial Securities,
warned that the pricing structure of China's commercial real estate
market is not mature enough for proper evaluation. This means
potential risks for investors.
Despite potential problems, analysts agree REITs will boost
China's financial derivatives market in the future.
"Investors will be attracted to REITs, and many mutual fund
companies will probably add REITs to their investment portfolio,"
said Zhang.
"Given China's large real estate market, there is a great need
for developers to raise capital and also for investors to choose
attractive yields products," he added.
REITs, first introduced in the United States in the early 1960s,
have won popular following among investors.
"The average return from a REIT investment is between bond and
equity investments," Zhang said. "Investors can get a stable income
because 90 percent of the income from the underlying properties in
a typical REIT must be distributed to investors."
According to global statistics from Harvest Fund, return on
investment (ROI) ratios for stocks and bonds were about 8 percent
and 5.3 percent respectively in 2006, while REITs were 16.8
percent. Capital raised from REITs is not usually taxable.
According to Harvest, there were more than 480 REIT products
listed in 19 countries and regions by the end of 2006, with a total
market value of US$485 billion.
Ren at Industrial Securities said REITs are an easier way for
companies to raise capital than an IPO (initial public offering),
which aren't always available to bottom- or mid-tier real estate
companies, or a bank loan, which can be difficult to secure.
Zhang agreed, adding that REITs need a long-term capital
investment from investors in order to improve the real estate
management.
According to the SSE's Chen, the exchange is developing a
worldwide leading Next Generation System (NGTS) that can provide
three different trading platforms for the product, including a
cross-matching system, a bulking trading transfer platform and a
bilateral quoting platform for fixed-income products with completed
market marker system.
Chen said the exchange is also considering taking measures to
increase market liquidity, including the expanding mortgage loans
and introducing related REIT index products.
"Compared with the inter-bank market and the property rights
exchange, the stock exchange has an advantage of wide investors
base, timely information disclosure and effective supervision,"
said Chen, quoted in China Business News.
(China Daily May 11, 2007)