REITs 'a relief for developers' amid housing downturn

REITs 'a relief for developers' amid housing downturn George Hongchoy, CEO of The Link Real Estate Investment Trust (Parker Zheng / China Daily)

The Chinese mainland should develop more real estate investment trusts, which will relieve financial pressures on developers as the property market slump continues, according to a top executive of Asia's largest REIT.

George Hongchoy, chief executive officer of The Link Real Estate Investment Trust, confirmed that his company is seeking assets on the mainland, where the expansion of major cities will offer opportunities.

Hongchoy confirmed that The Link has a project in the pipeline in the Pearl River Delta, although it is too early to give details. "For our initial focus, we chose the PRD region," he said, adding that The Link is still studying the market.

China's property slump has worsened in recent months. Prices fell for a third consecutive month in July, with a decline of 0.9 percent from June, according to the National Bureau of Statistics. Investment in the sector rose 13.7 percent in the first seven months of 2014, down from a growth rate of 14.1 percent in the first half.

While some economists have warned that the slumping property market may depress overall economic growth in China, Hongchoy said he remained optimistic. And he urged the government to encourage REITs, which invest shareholders' money in real estate and loans for property development. REITs invest mainly in commercial property and pass along the rents from those projects to shareholders in the form of dividends.

"For developers, it's a good way to recycle capital, to reduce the capital investment in property by putting it into REITs, so they don't have that cost of investing and cost of holding real estate," he said.

"Putting real estate management and investment into very professional hands is very positive for a lot of economies. I think China will move toward that," Hongchoy said.

Stephen Qiu, investment director of DTZ, a global property service provider, said: "It's a way out for developers, an ideal exit for those less liquid but income-generating shopping mall and office projects, given the oversupply in the mainland's residential property market."

The China Securities Regulatory Commission approved the mainland's first REIT earlier this year. CITIC Securities Co listed a REIT called the CITIC Qihang Specific Asset Management Plan on May 21 after raising $835 million at the end of April from a handful of institutional investors.

CITIC Goldstone manages the REIT, which is based on two office buildings originally owned by CITIC Securities Co Ltd in Beijing and Shenzhen.

REITs have become a significant and popular asset class in Asia. Since the launch of the first J-REIT in September 2001 in Japan, the market capitalization of Asian REITs, including Australia, now exceeds $170 billion, according to the Asia Pacific Real Estate Association.

REITs have been beneficial to the real estate market, APREA said in April. In addition to a relatively low cost of capital, REITs offer institutional and individual investors liquid exposure to income-generating real estate and can improve the quality of real estate assets.

"It is not often understood that REITs are financial instruments (and relatively new ones) that broaden and deepen the capital markets," it continued.

The Link Management Ltd, which manages The Link REIT, announced in December the signing of a memorandum of understanding on strategic cooperation with China Vanke Co Ltd, the mainland's top-selling developer.

Its expansion plans on the mainland aim to capitalize on the fast-paced growth of the ranks of middle-class consumers, particularly those who live in the suburbs of first-tier cities such as Beijing, Shanghai, Guangzhou and Shenzhen.

"If you can't afford living in the city center, you can choose to live 40 minutes away from the city center. That helps us as well, because once you are in the suburb, you will need community shopping centers, which is where we see the opportunity," Hongchoy said.