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China's first quasi Real Estate Investment Trust (REIT) is expected to be launched at the end of this month, an insider said.
The product - Lianxin Baoli - was designed by Union Trust, which specializes in real estate trusts.
"Different from other real estate trusts, we raise money first and then pour the money into lucrative real estate markets," said Chen Ying, director of the Business Management Department of Union Trust, in an interview with China Daily. "Besides prospective proceeds, we offer additional floating proceeds, which is quite similar with the dividend of funds."
However, Lianxin Baoli is only a quasi REIT as total sales are limited to 200 units, which cannot be circulated through banks' counters.
Chen also confirmed that this situation may change soon. The China Banking Regulatory Commission (CBRC), the industry watchdog, is mulling over the possibility of imposing a regulation on the real estate trust business. According to the temporary regulation, the upper limit on real estate trusts is expected to be loosened, with the restraint of 200 units removed.
But the threshold for launching an REIT is pretty high. CBRC mapped out nine criteria for qualified trust companies in the temporary regulation, such as minimal net assets of 500 million yuan (US$60.2 million) and releasing real estate trusts for three consecutive years. More critically, trust companies must have been run profitably in the previous two years, and more than 60 percent of their profits should come from the trust business.
"These criteria, especially the last one, are still quite demanding for most of the trust companies," Chen said. "Among the existing 59 trust companies, only over 10 percent of them bank most of their income on the trust business."
Nevertheless, the future of the REIT remains rosy due to strong market demand.
"Real estate trusts are catching on recently as real estate developers find it increasingly difficult to get money from banks," Chen explained. "On the other hand, real estate trusts provide investors with a more satisfactory return compared with deposits and treasury bonds."
The annual prospective proceeds of Lianxin Baoli reaches 5.3 percent, with floating proceeds not covered. In contrast, the return on a two-year treasury bond is just 2.86 percent, and the proceeds from deposits are even lower.
Moreover, Lianxin Baoli is the first real estate trust to be launched in installments.
"The initial installment is expected to reach 80 million yuan (US$9.92 million) for preferential clients and ordinary ones, with each unit valued at 250,000 yuan (US$30,120) for preferential clients," Chen added.
To better protect investors' interests, Union Trust has introduced a beneficiary meeting through which investors can have a bigger say in changing investment projects and trustees.
Chen revealed that Union Trust will invite a custody bank, but he declined to name it. "The trustee bank will be one of the big four State banks" is all he would say.
(China Daily February 21, 2005)
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