China likely to allow REITs as property policy eased

BEIJING (Reuters) - China may introduce property trusts this year, giving developers a much needed new source of funding, according to a top industry association official who believes Beijing is easing its tough stance as the property market cools.

The move could come as part of a government change of tack to ease tight monetary policies, many of which have been aimed at the property industry, according to Nie Meisheng, president of the China Real Estate Chamber of Commerce.

Beijing intensified a campaign late last year to clamp down on bank loans to the property sector, asking for higher down payments from homebuyers, as part of a wider effort to curb inflation and rein in runaway growth.

The steps hit home sales -- down 50 percent in Beijing, Shanghai and Shenzhen in July from a year earlier -- and prices in some areas of Guangdong province have fallen 25 percent.

Nie said the measures were aimed at cutting the industry's dependence on bank loans, which account for half of developers' funding, but added that Beijing was keen to ensure the property market did not collapse and hurt the broader economy.

"When one door closes, others will open," she said.

China has given the green light to big developers, such as China Vanke (000002.SZ), Poly Real Estate (600048.SS) and China Merchant (000024.SZ) to issue corporate bonds or new shares to replace loans coming due and to fund further expansion this year.

Setting up real estate investment trusts (REITs) -- securities that pay rent from their property as dividends -- will provide developers with a new avenue for funding, allowing them to effectively sell finished commercial buildings to investors.

"There will be some breakthrough by the end of this year," Nie said, referring to the introduction of REITs in China.

She said China's central bank was soliciting opinions from different government departments but declined to give a timeframe for any launch of REITs, or give any other details.

Many analysts believe property trusts will catch on in China because insurers are keen for stable investments to match their long-term liabilities, especially at a time when their stock investments have been hit hard by rocky markets.

REITs tend to yield more than bonds, and offer capital gains if property values rise, but they are typically less volatile than stocks.

China's insurance industry regulator said Beijing will soon allow insurers to invest in property, which could unleash as much as $40-60 billion of investment if they follow global industry norms of 10-15 percent portfolio allocations to the asset class.

Nie said the policies on property were "overly tight" because much had changed since they were rolled out last year when housing prices were soaring and developers raked in bumper profits.

The official property outlook index, a measure of industry confidence, fell to 102.36 points in July from its November peak of 106.59. Nationally, property sales fell 10.8 percent in terms of area sold in the first seven months from a year earlier.

However, Nie, an industry veteran who has spent her whole career working on infrastructure and real estate, was confident most property firms would ride through the difficult times.

"Prices haven't dropped, bankruptcies haven't occurred," Nie said. "That means developers can still hold on, and there will be no big problem."

She said some local governments were not implementing the measures as strictly as before. Some were allowing developers to delay payments for land purchases, instead of taking plots back after two years if construction had not started, she said.

"The policies look tight, but they're softening quietly," she said. "Otherwise, why haven't developers died yet?"

The China Real Estate Chamber of Commerce launched a trial REIT last year, although it is not publicly traded, unlike trusts in Japan, Singapore and Hong Kong, where the securities have caught on in the last six years.

The trust, which started with 2 billion yuan ($292.7 million) of funds from China's biggest developers, has invested in some projects and would quickly expand once the government officially allowed REITs, Nie said.

It is aiming for a 35 percent annual return on capital but would settle for 20 percent, according to China Union Trust and Investment Ltd, a partner in the launch.

(Reporting by Langi Chiang; Editing by Ken Wills)

($1=6.832 Yuan)