Is China ready for REITs? : an examination of challenges and opportunities

Abstract

With the current absence of a REIT-styled vehicle in China, this thesis examines the potential opportunities and obstacles pertaining to the future introduction of REITs in China. The thesis provides a comparative analysis on major REIT regimes around the world, in terms of formation, structuring and operation guidelines, to identify their level of similarity and variance. The thesis then shifts its focus to China, examining the development background of China's real estate sector and analyzing China's market fundamentals and regulatory environment. Lastly, the thesis provides a closer look at the REIT sector in Singapore and Hong Kong and discusses their operational experience of the assets in China. The thesis finds that REITs are regulated differently among countries. However, a number of core criteria must be maintained to ensure the success of REITs in China. Commercial real estate, although accounts for a small share of the real estate market currently, has grown rapidly in recent years and is at the beginning of a boom as China continues to grow and mature as a market economy. On the capital side, the Chinese real estate companies are heavily dependant on bank loans to finance their development projects and there is a strong need for alternative and diversified financing vehicles for future growth. However, China also proves to be a complex market with a unique state-owned land system, with many social issues to confront as a developing country and with a constantly changing and evolving regulatory framework. All of these pose numerous challenges to the adoption of REITs in China. It is clear that a REIT-styled investment vehicle fits the current and future needs of the Chinese real estate sector. Although China is not yet ready to adopt REITs by international standards, China must pursue the experiment of such practice amid of the challenges. China's growth path in the past thirty years with its remarkable economic reform has just proved this point.