China seen kick-starting property trust market

By Dominic Whiting

SINGAPORE (Reuters) - China could kick-start a property trust market next year to give its pension funds and insurers an alternative to volatile stocks and meager returns from government bonds, according to an industry group.

The move could lead to the listing of as much as $60 billion worth of buildings in the form of real estate investment trusts (REITs) over the next five years.

And although it is unclear whether overseas investors would be allowed to invest in the securities, foreign property funds in China are keen to see new potential buyers for the office blocks and shopping centers they are accumulating.

Stock market watchdog China Securities Regulatory Commission (CSRC) sent a delegation to Australia in May to study property trusts, and is working with other authorities including the central bank to draw up legislation.

The trusts will probably be externally managed, in line with the Singapore and Hong Kong model, said Peter Mitchell, head of the Asian Public Real Estate Association, which is advising the CSRC on the matter.

"A pilot REIT could possibly get underway next year," Mitchell said. "They see pension funds and insurance companies as the main investors, as well as the man on the street."

Property trusts, which pay most of their rent as dividends, have been long-established in the United States and Australia, but have caught on across Asia over the last five years as commercial property markets rode a cyclical upswing.

Asian REIT market capitalization has grown to around $80 billion, but unit prices have dropped this year -- by as much as 24 percent in Japan -- as investors demand higher rental yields to compensate for rising bond yields and inflation.

Some in the property industry believe it is too soon for the securities to make their debut on China's choppy bourses, which have seen big initial public offerings but do not have a good record for the kind of secondary offerings REITs need to grow.

"The authorities are struggling between two elements," David Edwards, Asia investment strategist at LaSalle Property Investment, said at the Reuters Global Real Estate Summit in Singapore.

"The market is jittery and a REIT could tank. Or because a new product comes out, people pile in because they think it will turn water into gold."

But China is pushing ahead with REITs because insurers and pension funds are desperate for the stable returns they offer to match long-term liabilities, Mitchell said. REITs tend to yield more than bonds, and offer capital gain if property values rise, but are typically less volatile than stocks.

Beijing is talking about allowing insurance firms to invest in property, but at the moment they are only allowed to invest in stocks, bonds and deposits.

Flush with $300 billion for investment, insurers could spend as much as $30-40 billion on Chinese commercial property if they followed global industry norms of 10-15 percent portfolio allocations to property.

If China's REIT market grows along the lines of Japan's, it could be worth some $60 billion in five years time.  Continued...