Lack of Chinese REITs Means Mainland Investors are Missing Out

One of the unintended results of changes in China’s real estate policies in the last few years, is that it may now be easier for foreign investors to profit from China’s property market than it is for local residents.

The IPO of Mapletree Greater China Commercial Trust (MAGIC) this month was Asia’s biggest share sale this year, and was met with overwhelming enthusiasm by investors looking to profit from growth in the region’s real estate market, particulary in China. Shares in the REIT gained 10 percent on their first day of trading.

And the reasons for the Mapletree REIT’s strong debut are obvious. Foreign investors in ETFs and REITs which invest in Chinese real estate assets achieved substantial returns last year purchasing over the counter financial products. Meanwhile Chinese investors were filing for divorce and taking other desperate measures to preserve the returns on their property investments.

In the world of ETFs, Guggenheim China Real Estate ETF, a China focused exchange-traded fund achieved earnings equivalent to 56 percent of total investment in 2012, the highest among all U.S. ETFs.

And all of this was done without investing directly into real estate projects on China’s mainland. The fund simply invested into publicly traded property developers such as Wharf, Hang Lung and others which have numerous projects in China.

In the REIT realm trusts such as CapitalRetail China Trust offer investors the ability to buy a security that profits from numerous China real estate projects, in different areas of the country. And this REIT traded on the Singapore exchange has achieved enviable returns, with net income growth reaching up to 16 percent in 2011.

However, no such REITS or publicly traded real estate funds are available for local investors hoping to profit from the gains being achieved in China’s property market.

This means that local Chinese investors continue to rely on buying individual homes, purchasing shares in single developers on volatile local stock exchanges, or participating in less-liquid trust products offered through banks and other financial institutions as the only means of profiting from the real estate market.

But due to strict initial public offering restrictions, establishing a REIT that can be publicly traded is still far off. Chinese officials provided signals as early as 2009 that the government could implement a long-awaited plan to allow mainland builders to raise capital through REITs, but such plans have yet to materialize.

People involved in the consultations of a REIT program with regulators have said that there are issues in China’s legal system that need some ironing out, particularly with regard to IPOs that need to be resolved before the nation’s first REIT can debut.

Until more sophisticated financial products such as REITs are available to mainland investors, the markets can expect greater volatility in the residential real estate market, and more growth in poorly regulated and often-murky trusts.