The Chinese real estate asset securitization process : opportunities and challenges

Abstract

China's real estate market has recently experienced a down turn after decades of exponential growth. High returns on new developments used to attract large capital inflow to the real estate market. Yet as the real estate market slumps and the profit margin drops, the real estate market is now experiencing a shortage of capital. The modem Chinese real estate market only started around the early 1990s. With just 25 years of history, it has grown to be one of the largest real estate markets in the world. Compared to the huge advancement in the development industry, the real estate investment market seems to have lagged behind. Domestic private equity investment in Real Estate only became popular around 2009. Currently, the majority of the developers in China are still relying on traditional bank loans and internal cash to finance their projects. While compared with their foreign counterparts, the Chinese developers do reserve lots of cash, the general trend is to employ less internal capital and rely more on external equity financing. As a result, the Chinese real estate capital market welcomes and demands financial innovation, particularly on the public side. Both public equity market and the public debt market are under experiment in China. This thesis first investigates REITs and CMBS in the US from a historical perspective. Then it directs its attention to China and investigates the opportunities and challenges lying ahead for the Chinese public capital market. The thesis concludes with a prediction of the characteristics of the first Chinese REITs and CMBS. It will try to answer the following questions. Does China need a securitized public market like the US? Is China fully prepared for such a real estate financial transformation? What current securitization products are out there in China? What regulations need to be further addressed to establish the Chinese REITs and CMBS markets? What would the first Chinese REITs and CMBS be like in the near future?