Faculty & Research


China’s government on April 30 issued a circular that gave green light to the country’s real estate investment trusts (REITs), a key move to help finance a burgeoning rental housing market, diversify investment options for households and stabilize the real estate sector.

Describing a public market for REITs as a crucial part of China’s supply-side financial reform, Professor Zhang Zheng with Peking University’s Guanghua School of Management says this move will help revitalize the country’s post-covid-19 economy in the coming months and is also a key effort to solve structural problems holding back China’s investment and financing mechanism in its real estate sector in the long run.

According to Zhang, most of the 42 countries adopting REITs launched the program amid economic downturns in a bid to boost economic vigor, and after meticulous research and planning since 2007, the timing of China’s REITs is “exactly right.”

The pilot program will first cover the infrastructure realm, a mature and smooth market for REITs that include wireless communication, ports, tolled motorways, urban utilities, warehouses and information networks. Figures show that market value of REITs in the U.S. had amounted to 1.27 trillion U.S. dollars by June 2019, and 22 percent of their products were in infrastructure projects, with a value share of 31 percent. Singapore and India have their own REITs issued in infrastructure.

Zhang noted that the country’s infrastructure area is in urgent need of investment and financing reform and the choice for the pilot is expected to liquidize a huge amount of remnant assets, reduce leverage and stem local governments’debt risks. It will also help direct funds from other sources into infrastructure projects and boost their quality operations with the capital market’s open and transparent pricing mechanism.

“It is a reliable and reasonable choice based on careful consideration and solicitation of public opinions,” Zhang said, adding that infrastructure REITs are characterized by low costs and high efficiency and will interactive well with China’s current real estate policy.

According to the circular, the program will follow the global standards of public issuance and trade and reference other mature REITs market in setting up rules concerning equity rights, income structures, dividend ratio, leverage ratio and governance.

Securities and asset management firms licensed to handle mutual funds are allowed to set up mutual funds for public trade and acquire infrastructure properties through purchasing asset-backed securities (ABS). Zhang noted that this method is aimed to prevent legal disputes following mutual funds invested in shares or eal estate properties of non-publicly traded firms and allow reasonable valuation to reduce trading costs. Public financing via mutual funds lowers the threshold for real estate investments and diversify investment options for individual investors.

The circular stressed that REITs must follow the basic principles of being in line with national policies, focusing on quality assets and sticking to market rules and investors’ interests. “Upholding market rules is a key requirement for the country to create an open, transparent and effective REIT market that protects and benefits both sides of investment,”Zhang said.

According to the plan, key target regions include the Beijing-Tianjin-Hebei urban agglomeration, the Yangtze River economic belt, the Xiongan New Area, the Guangdong-Hong Kong-Macao Greater Bay Area, Hainan Free Trade Zone as well as other state-level special economic zones. Key industries include warehouses, logistics, tolled motorways,urban utilities, sewage and garbage processing facilities and anti-pollution projects. Information networks and other new technology infrastructure projects as well as parks of strategic emerging industries and hi-tech firms should also be prioritized. It stressed “quality programs” that feature clear ownerships, market-oriented operations, steady cash flows and managers with long-term operation capacities.

“With REITs, China is exploring a more flexible policy approach to financial innovation, aiming to boost the quality of the country’s infrastructure projects and give up the traditional leverage-based financing methods,” Zhang said, adding that REITs will play a crucial role in enhancing real estate investment efficiency and optimize resource allocation.

Meanwhile, Zhang noted that most of these new-type infrastructure projects are long-term investments and of a large scale,with uncertainty in research and development as well as commercial potentials. “Their financing should not rely on credits too much. Instead, a market-based equity financing mechanism is preferable to form a sustainable investment and financing chain that guarantees multiple rounds of funds coming from the market, and REITs can be the last round of this chain.”

According to Zhang,the Ministry of Housing and Urban-Rural Development and China Securities Regulatory Commission, which jointly released the circular, have organized experts (including Guanghua scholars) on multiple inspection tours across the country to visit firms and solicit opinions from local governments, companies as well as financial and academic institutions prior to the move.

“With the pilot program conducted smoothly and enough experience gathered, we will hopefully see the REIT market extend to other fields,” Zhang added.

© 2019 Guanghua School of Management Peking University