Developing a Mainland China REIT Return Index (2015-2020) through a Pure-Play Approach

Abstract

As China takes steps to develop a REIT market, institutional investors are keen to seek a proxy for expected returns in this potential market for formulating investment decisions. Expected returns on an exante basis are typically based on ex-post return data, and since China does not currently have a REIT market, there is no historical data available. One prism through which to view this issue is the historical returns of the REITs traded in the Singapore exchange with mainland China exposures. Some observers have cited the performance of the REITs in the Singapore exchange with pure allocations in mainland China as a proxy. However, the skewed market allocations of this portfolio of REITs render it an inaccurate representation of a hypothetical Chinese REIT market. Through applying the pureplay methodology developed at MIT onto REITs that are not by themselves pure in Chinese mainland allocation, this thesis creates an alternative and improved way of producing a shadow Chinese REIT return index for a hypothetical mainland REIT market, and provides crucial insights into the question: what would the performance have been like in the past several years, had China had a REIT market for commercial real estate?