ABS Regulations Pave Way for 4 Trillion Yuan REIT Market

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A new government notice pushing for the securitisation of residential rental property assets is expected to give impetus to a potential market of 4 trillion yuan in real estate investment trusts (REIT).

On 25 April the China Securities Regulatory Commission and the Ministry of Housing and Urban-Rural Development jointly released the “Notice Concerning Work in Relation to Advancing the Securitisation of Residential Rental Property Assets” (关于推进住房租赁资产证券化相关工作的通知), which outlines basic requirements and detailed procedures for the securitisation of real estate assets.

The Notice is the first directive jointly issued by CSRC and MOHURD since the State Council unveiled policies to accelerate the growth of China’s residential rental property market, as part of efforts to address limited urban housing supply and overheating real estate prices.

In addition to ABS procedures, the Notice also flags focused support for the issuance of securitised products by residential rental property companies, and outlines the trial launch of real estate investment trusts.

Domestic observers expect the new regulations to pave the way for the rapid growth of China’s REIT market by first driving the securitisation of residential rental properties.

One analyst said to Yicai  that China is already host to many REIT-style investment vehicles, but they are all privately placed, as opposed to conventional REIT’s which are publicly offered.

 

A research report published on 27 April by China International Capital Market points out that the Chinese REIT market could reach 4 trillion yuan in size, with residential rental property REIT acting as the “vanguard” product.

CICC sees residential rental property REIT’s becoming the  “breakthrough point” for the market, by providing a far more convenient means of investing in the real-estate sector than direct purchases of real property.

According to the CICC report a lack of legal and regulatory clarity, duplicate taxation, a scarcity of high-quality assets that can be securitised as well as a lack of specialist personnel have thus far been the primary factors impeding the growth of the REIT market in China.

CICC suggests that support for REIT in China focus on clarification of legal and regulatory bodies, as well as tax exemptions to deal with duplicate levies, which could raise the average returns for Chinese REIT’s by 2 – 3 percentage points.

China is already host to a flourishing ABS sector, with the “2017 Asset Securitisation Report” (2017年资产证券化发展报告) indicating that 2017 saw the issuance of 1.452 trillion yuan in ABS products, for a year-on-year rise of 65.86%.

As of the end of 2017 the balance of outstanding ABS was 2.0688 trillion yuan, for a YoY increase of 66.41%.

The flourishing growth of ABS in China over recent years has been closely tied to the real estate sector, with real estate developers, long-term rental apartment operators and other property service providers making forays into the securitisation of assets.

 

 

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