RPT-Fitch: CITIC Securities' Product Resembles ABS More Than REIT

Tue Apr 22, 2014 4:41am EDT

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April 22 (Reuters) - (The following statement was released by the rating agency)

Fitch Ratings says the financial product to be issued by Citic Securities, backed by rental income from office buildings, is more similar to asset-backed securities (ABS) than a real estate investment trust (REIT).

Various media reported recently that Citic Securities is ready to issue the first REIT in China. Yet, there are a number of differences between the Citic product and a typical REIT according to international standards. Firstly, the Citic product will be traded privately while a REIT is traded publicly with good liquidity. Secondly, the Citic product offers predetermined yields to investors from two tranches, instead of delivering at least 90% of distributable income, which is a feature commonly seen in REITs. Thirdly, the product has a finite time horizon and may be subject to refinancing risk at maturity.

The proposed CNY5.2bn product has two tranches. The CNY3.65bn tranche A yields 7%-9% and the CNY1.56bn tranche B offers a yield of 12%-42%, according to IFR Asia. The two tranches are backed by rental payments from two Citic-owned office buildings situated in prime business districts in Beijing and Shenzhen. The product, which has a term of three to five years, is being offered to institutional investors on a private basis and will not be traded publicly in the secondary market.

The issuance of Citic's product will take China one step closer to the liberalization of the country's REIT framework. However, Fitch does not expect this to lead to any major breakthrough in the near term. Regulatory and tax issues still remain the key hurdles.

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