Developing a National Framework for Introducing REITs in China – A Lengthy Process

This article proposes a process by which a new national framework for listing real estate investment trusts (REITs) on the Shanghai stock exchange in China could be developed and implemented. It makes some assumptions about the actors involved and the action required, and presents a timeline for the plan. While theoretically, good REIT legislation is a price-stabilizing factor on the market, there is some reluctance in government circles to permit listing of a publicly tradable REIT vehicle. There are questions to resolve, what structure could a REIT take in Shanghai and, if the REIT is introduced, whether it can be a factor that would contribute to market stability in an emerging capital market and have a stabilizing effect on Shanghai's overheated real estate market and volatile capital market. If this could be proven with econometric tests, it would make an effective argument for the China Banking Regulatory Commission (CBRC), China Securities Regulatory Commission (CSRC) and Shanghai Securities Exchange (SSE) to permit the listing of REITs. The process outlined in this article would be carried out in three stages, the first resulting in an unlisted pilot product, the restricted institutional REIT; then an interim, slightly expanded version, the development REIT; and finally a truly liquid, tax-neutral, stable, publicly traded REIT. The prerequisites for the first, restricted vehicle are discussed extensively in this article. The trust laws, tax regimes and regulatory and professional feature development are benchmarks in the process. The whole process is likely to take three and a half to four years. The Chinese government, rightly so in this author's opinion, is proceeding in a stepwise fashion by first developing appropriate tools, standards, guidelines, regulations and laws before fully opening its capital markets to instruments that may have little meaning and could even threaten its economic stability. It will be some time before we see a full fledged REIT on the market in Shanghai