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REITs may bloom after taxation thorns removed

By Hui Ching-hoo (China Daily)
Updated: 2008-12-11 07:58

The central government might give a nod for the long-awaited real estate investment trust (REIT) next year, but some experts remain doubtful whether the market is well-prepared for the debut.

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China Real Estate Chamber of Commerce's president Nie Meisheng said mainland departments have reached a consensus in legitimizing REIT, and the relevant regulations are expected to be released as early as next year.

If that becomes the case, the mainland will be the REIT latecomer in the region compared with neighboring markets such as Japan and Singapore.

Japan is one of the regional pioneers in developing REIT; the first J-REIT security was traded on the Tokyo Stock Exchange in December 2001.

Singapore is another mature REIT market in the region with more than 15 properties trusted trading in the Singapore exchange.

As for Hong Kong, the first property trust began to trade on the Hong Kong bourse in November 2005.

Relatively, mainland's REIT development has lagged behind its peers.

GZI REIT Asset Management is the only mainland-based REIT listed on the Hong Kong exchange since October 2006.

"Taxation is the main hurdle," said Remy Chan, Jones Lang LaSalle national director.

He said mainland regulators have not worked out how to cope with controversial issues such as double taxation - taxes imposed on both property assets and dividend payment of REIT.

Also, Sun Fei, managing director and chief economist at China International Capital, earlier said that the roles of regulators in monitoring property trusts remain vague.

According to the mainland regulation, trusts are under supervision of the China Bank Regulatory Commission (CBRC). However, the China Securities Regulatory Commission (CSRC) must undertake monitoring tasks if the trusts are to trade on the bourse.

Therefore, Sun urged the two regulators to make a clear task division.

"The main purpose of REIT is to provide an alternative for developers to raise money in the market, but I am in doubt whether developers will make use of the fund-raising platform with the weak market demand," said Raymond So, associated professor of the Chinese University of Hong Kong.

Raymond Ho, deputy managing director of Vigers Asia Pacific, pointed out that only a handful of commercial properties on the mainland are eligible to package as REIT because many developers prefer to partition their buildings and sell them separately rather than keeping property rights intact for rental uses.

Furthermore, Chan noted that the relaxation of REIT will not help mainland developers much because a large proportion of mainland developers are residential-orientated.

However, Chan said more local developers strive to increase their exposure to the commercial property sector. For instance, Wanda Group earlier joined hands with Macquarie Group to develop Wanda Plaza in Shanghai and plans to package it into REIT.

"In the long run, the mainland has the fundamentals to become one of the leading REIT markets in the world," he said.