A number of mainland property developers have consulted Hong Kong analysts and bankers about listing real estate investment trusts (REITs) overseas, despite a lack of a legal framework and tax considerations.

 

"At least 10 developers have talked to me about their intention of launching REITs," said Gary Lee, assistant general manager of a leading Hong Kong property agency Centaline (China).

 

He was referring to his experiences at a symposium in Guangzhou recently.

 

The developers range from large companies that have already listed in Hong Kong to smaller players in second-tier cities, he said, without revealing any of their names.

 

"Many mainland developers are mature enough to launch REITs," Lee said.

 

The REIT, a financing tool popular in developed markets but new on the mainland, trades like stock on exchanges and invests in real estate directly. Usually, developers spin off commercial and retail properties into REITs and pay dividends to shareholders from rentals.

 

In theory, REITs offer developers easier and wider access to capital and help them share risks with a wide range of institutional and individual investors, who in turn get a high and steady yield by investing in the trust.

 

One European investment bank told China Daily it has received inquiries from four mainland companies about spinning off assets into REITs and one of them has hired the bank to "study the feasibility of doing so".

 

But the bank's spokesman refused to give the firms' names, only saying "the deals are at the consultancy stage, without much substance."

 

Mainland developers' interest in REITs has been on the rise since Guangzhou Investment listed the first property trust entirely comprised of mainland properties in Hong Kong in December.

 

So said Lau Chun-kong, regional director of valuation advisory services at Jones Lang LaSalle, a world leading property consultant.

 

According to media reports, at least three companies have openly said they are studying REIT possibilities.

 

They are Shenzhen-based OCT, Hangzhou-based China Greentown and Beijing-based North Star.

 

"I think there will be more," said Lau, believing the REIT dream is natural for developers who have a lot of commercial and retail property assets.

 

Guangzhou Investment REIT, for example, operates four commercial properties City Development Plaza, Fortune Plaza, Victory Plaza and the White Horse Building in Guangzhou's prime business area of Tianhe District.

 

However, some market players said the "REIT road" for mainland developers will be full of problems, citing legal ambiguities and tax problems.

 

"The government may need at least three years to legitimize the REIT market," said Patrick Wong, a manager of Dynamic Holdings, a Beijing developer.

 

At this stage, there is no specific legislation for REITs.

 

Dual taxation appears to be another obstacle. On the Chinese mainland, a property developer and its REIT are both subject to corporate tax, while in overseas markets a REIT is usually exempt from taxation.

 

In some places, such as Japan and Singapore, more attractive tax regimes are given to investors and companies wanting to spin off their assets into trusts.

 

(China Daily June 27, 2006)