REITs to bolster public sector rental apartment market

Government considering affordable housing pilot in top cities, says report

Real Estate Investment Trusts appear to have got a fresh lease of life in China, with the government planning to grant approval for similar programs in public rental housing projects in first-tier cities, a news report said on Thursday.

The Ministry of Housing and Urban-Rural Development has selected four cities - Beijing, Shanghai, Guangzhou and Shenzhen - to pilot the REIT program for construction of affordable houses for rent, the Xinhua-affiliated Economic Information Daily said on Thursday, citing industry sources. Preliminary plans formulated by the four cities have already been submitted to the ministry for final deliberations, it said.

REITs are trust funds managed by specialized investment organizations. They collect capital from specific investors by way of income certificates and then allocate the funds for investment. They are favored by economists, developers and financial professionals alike as the funds securitize and invigorate existing assets, cut investment and holding costs for developers, and provide an alternative option in the capital market.

The People's Bank of China had in 2010 urged cities like Tianjin and Shanghai to implement pilot programs in this field. However, the plan did not make much headway due to concerns overheated property market.

"This is definitely good news for introducing social capital into the public housing construction field," said Li Xiaopeng, an urbanization financing expert with Urban China Initiative, a think tank, founded by global consultancy firm McKinsey & Co, US-based Columbia University's Global Center for East Asia and Tsinghua University.

However, what might disappoint the market, the report said, is the fact that the pilot covers only affordable houses for rent, while commercial property, the most favored asset target which formulates mainstream practices in mature markets, is excluded.

The difficulty with public rental housing is the low return rate, something that may not appeal much to private investors. Frank Chen, executive director and head of CBRE Research China, said even if one just considers the pure construction cost, the rate of return would be just 1 percent, far below the 6 to 8 percent benchmark return that most global REITs require. But returns to investors can be enhanced if local governments are willing to inject public housing assets into the REITs at deep discount.

China plans to build 36 million units of affordable houses during the 12th Five-Year Plan period (2011-15), and 40 percent of these would be made available for rent. The affordable housing construction program would need capital of about 2 trillion yuan, the Economic Information Daily report said, adding more burden to local governments.

Chen said it is unrealistic to expect the REIT program to ease that burden. The real value of the REIT program is that it acts as an additional funding source, he said.

International experience has shown that it is vital to offer tax breaks for REITs, especially if the government wants the market to be truly developed, he said.

It is unclear whether the pilot program actually signals that REITs would be applied to wider types of properties, as the reform was led by several parallel regulators. On Sept 30, the central bank issued a document in which it encouraged "active and orderly" development of the REIT pilot.