1. Developing a National Framework for Introducing REITs in China - a Lengthy Process
by
Roxanne B. Andrieux
Shanghai, September 20, 2010
Electronic copy available at: http://ssrn.com/abstract=1680112

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Abstract
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.
Electronic copy available at: http://ssrn.com/abstract=1680112

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Introduction
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 actions required, and
presents the outcomes, future state (two to five years out), milestones, and timeline of the plan.
Theoretically, good REIT legislation is a price-stabilizing factor on the market. There are major
questions to resolve, what a REIT is and what structure a REIT could take in Shanghai; and, if
the REIT is introduced, whether it can be a factor contributing to market stability in an emerging
capital market in general, and have a stabilizing effect specifically on Shanghai’s overheated real
estate market and volatile capital market. If this could be proven with econometric models, 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. This article focuses specifically on the Shanghai securities market,
though the same arguments may be extrapolated to the Shenzhen exchange and other trading
markets in China.
According to the academic literature, when investors have few alternative investment
vehicles available, speculation on property contributes to the creation of an economic imbalance
(Hui, Liu & Shen, 2005). The market drivers are developers that could raise funds on the capital
market for property development and acquisition programs, domestic and foreign institutional
investors, and individual investors that need a range of investment choices. They act as push
factors on the demand for REITs. One of the advantages of REITs is that they "allow a property
developer to gain capital from its real estate portfolio by placing it in a trust and listing it on an
exchange. This is then tradable, and the capital realized from its sale can be reinvested" (R.,

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2009). For the individual retail investor a REIT is quite a convenient structure since the investor
does not actually purchase the physical asset, but purchases trust units that give the investor
access to the trust’s cash flows from the rental income of a pool of revenue-generating
properties. The hypothetical problem to investigate is whether—given the current economic
environment in China—the REIT should be considered a safe vehicle for the risk-averse and for
those who are not onsite to personally manage a real estate portfolio. The emerging capital
market needs to be nurtured quickly but carefully. The relevant legal and financial environment
needs to be developed so that listing new investment vehicles such as the REIT can be done
without negative impacts on the economy in general and the capital and real estate markets in
particular. In forming new legislation, the Chinese government can influence the REIT structure,
circumscribe the investment activities, and restrict shareholders and management functions. In
the eyes of the government, the ideal outcome is not only that a new publicly listed instrument is
available to individual investors, but that the SSE be regarded around the world as one that fits
the definition established by Chin, Dent and Roberts (2006) of an attractive market for
investment, where the business and financial culture is one of “market openness,
professionalism, the presence of property intermediaries, information availability and
standardization, development stability, flexibility, quality of property products, and user and
investor opportunities” (p. 55).
The CBRC drew up “provisional rules” to permit the REIT in 2004; and in 2005, a
proposal to introduce REITs was submitted to the central government; however there were
clearly some regulatory shortcomings (Nie & Yu, 2005). The SSE “set up a specialized research
unit in March 2007 [which demonstrated that the] SSE is determined to become one of the REIT
hubs of Asia” (Ong & Quek, 2007, p. 255). In August 2009, a special team led by the central

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bank of China and comprising 11 ministers was established to speed up the research and
development of REITs in China. In December 2009 the State Council of the government in
Beijing had approved plans for a REIT framework, but another REIT plan was submitted to the
State Council for approval in June 2010. Nevertheless as of late 2010, it still had not been
adopted in Shanghai or on any other exchange in China. The process proposed in this article
would be carried out gradually, in three stages, the first resulting in an unlisted pilot product,
then an interim, slightly expanded version and finally a publicly traded REIT.
The REIT Regulatory Framework: a Review of the Academic Literature
Other capital markets, both mature and emerging, with publicly listed, securitized REITs,
serve as models from which the CBRC and CSRC draw lessons. Analysis of the impact of
introducing the instrument on capital markets, at the moment of and following its introduction,
would shed light on its merit. In order to assess the safety of the REIT investment vehicle, long-
term observations and econometric tests need to be made to measure REIT performance behavior
and establish its integrity during periods of financial crisis, specifically in the U.S. during the
2007-08 financial crises and in Asia during the 1997-98 crises. Next, the precise structures of a
REIT vehicle as spelled out in law need to be compared. Aspects of mature economies should be
examined closely for features that are conducive to successful implementation of REITs on their
securities exchanges.
To further investigate whether the Chinese government’s reluctance to introduce the
REIT heretofore is justified, this author examined the econometric studies in the works of K.H.
Liow, that evaluate the relationships between performance of securitized and real property. Liow
highlighted advantages of the former, and emphasized the fact that securitization enables
investors to hold property indirectly without the responsibility of managing the physical assets

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(Liow, 2001). Another early study tested the relationship between the volatility of physical
property returns and volatility of stock market returns, concluding that “it is very likely that
property stock return and volatility characteristics are different from those of stock markets
(especially) in the long term” (Chen, Lee, & Rui, 2001, p. 533).
Within China, the English-language literature is scarce. Tsinghua University’s School of
Economics in Beijing published a summary of the legislative and regulatory environment as of
2008, the first paper ever to appear on the topic (Chen, Sun, & Wang, 2009). The majority of
academic literature focuses on the REIT story in the U.S, Canada and Australia; many of the
professional journals are U.S. or Canada-based with relatively little attention paid to
developments overseas. Regarding the general structure of REITs, the foremost authorities are
Block, Campbell, Ghosh, Newell, and Sirmans who, according to a 2002 survey of journals, have
produced a vast body of literature (Acheampong, Juchau, Newell, Webb & Wing, 2002). The
literature is sorely lacking in regards to the exact impact of introducing the REIT vehicle in the
capital market—particularly in an emerging capital market where the real property market is
overheated, as is the case in Shanghai.
The REIT has existed on the financial markets in the U.S. since the 1960s. In Japan, J-
REITs, as the Japanese vehicle is called, have existed since 1970 and have been introduced
elsewhere within Asia more recently, with the Philippines being the latest entrant in June 2010.
REITs received a significant boost to their reputation as reliable investment vehicles in 2001
when Standard & Poor’s indices included them for the first time, stating that such inclusion
furthers its goal of reflecting “the U.S. equity markets and through the equity market, the U.S.
economy” (National Association of Real Estate Investment Trusts, 2003, p. 3). Furthermore,
Jorion (2003) established that the introduction of international equities had a stabilizing effect on

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an overall portfolio through diversification. Hoesli, Lekander, and Witkiewicz (2004) argued that
adding international real estate is an excellent and necessary way of diversifying a portfolio.
During the 1990s large institutional investors became significant REIT players, and it
was shown that “the increase in institutional participation in the REIT market in the 1990s have
resulted in REIT stocks behaving more like other equities in the stock market” thereby possibly
reducing the diversification benefit of adding REITs to an investment portfolio (Chan, Leung &
Wang, 2005, p. 100). Following the 1990s in the U.S., the REIT structure and investment
strategy gradually changed and it became less of a pass-through vehicle simply collecting and
distributing rental income and more actively managed for high growth (Ooi, Webb & Zhou,
2007).
Many studies show that a portfolio still benefits from the introduction of REITs, from
diversification, as well as from internationalization (Camilo & Hoesli, 2007; Cauchie & Hoesli,
2006; Cheong, Wilson, & Zurbruegg, 2008; Huang, Ibrahim, & Liow, 2006; Liow, 2006). The
benefit of holding widely distributed international real estate instruments would have been true
particularly in the case of the addition of assets in Australia which had relatively stable economic
conditions while the rest of the Western world suffered a downturn in 2007-08 (Chee, Wilson, &
Zurbruegg, 2008). In addition to internationalization of real estate investment and REITs in
particular, the first decade of the 21st century was characterized by the trends of privatization and
private equity investment. At a REIT Conference in Shanghai in 2006, an entire working session
was dedicated to the subject of private equity where the prevailing sentiment was that the world
was “awash with private equity”. Between 2006 and 2009 at least some REITs were taken
private and de-listed. From 2006 to 2010, the trend pertinent to real estate holdings and real

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estate development continued to be internationalization and in late 2010, REIT listing was in
vogue once again.
In spite of certain drawbacks, the U.S. serves as the base reference for the structure of the
REIT vehicle itself as well as for the regulatory environment in which it exists on a financial
market. In contrast to publicly listed equities, the unique features of a U.S. REIT are that it must
distribute at least 90% of annual taxable income, have at least 75% of assets invested in real
estate, and derive at least 75% of income from rents (Block, 2006). After Japan adopted the
REIT in the 1970s, Malaysia introduced a REIT-like vehicle in 1989 (Acheampong, Ting, &
Newell, 2002). The next Asian real estate funds were introduced in Korea in 2001 and in
Singapore in 2002 (Pua, 2005). Hong Kong adopted the REIT within the last decade and the
U.K. and Germany also started using it in 2007. Though Malaysia had an abortive start in 1989,
the market is undergoing a reprise in 2010 with the announcement of two new REITs scheduled
for July (Business Times, June, 2010). In the case of China, the first REIT containing mainland
property was actually listed in Hong Kong in 2005 (Li & Lam, 2006). The second REIT with
100% Mainland property assets was securitized in Singapore in 2006 (Ong & Quek, 2007).
In order to identify structural commonalities among REIT vehicles around the world,
Hoesli and Serrano (2009) identified operational, financial and shareholder requirements across
REITs in 31 countries. General tendencies are clear. Operationally, most REITs have 75% of
their equity invested in real estate, at least 80% (and sometimes as much as 100%) of their
income distributed as dividends, their debt levels and leverage are constrained, and minimum
initial capital requirements are generally imposed on the shareholders (Hoesli & Serrano, 2009).
The fine details of each aspect need to be evaluated to find the right balance for China’s
particular requirements. A key finding of Hoesli and Serrano’s (2009) analysis highlights the

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different nature of property activities from region to region within the REIT structure. In contrast
to the U.S. and Europe they write, “In Asia… property markets are mainly dominated by
property developers and by investors in search of potential capital gains rather than rental
income. This makes both securitized and private property companies in Asia more volatile than
in the other continents” (p. 16).
Several key factors found in countries’ macroeconomic environments appear to be
conducive to the successful implementation of REITs on securities exchanges. These include: a
mature economy and capital market, clear property law, tax legislation, company law, and
securities regulations pertaining to listing, delisting, takeover and merger. Without an adequate
regulatory environment, concern arises over the premature formation and listing of new
investment vehicles negatively impacting the economy and the real estate market. The
aforementioned summary of extant Chinese legislative and regulatory framework by Chen, Sun
and Wang (2009) may be compared to that in Taiwan (Lin, 2007) and South Africa
(Acheampong, Du Plessis & Newell, 2002)—both mature and successful cases—and to
Malaysia’s abortive attempt to introduce REITs in 1989 (Acheampong, Ting & Newell, 2002).
A comparison between the regulatory environments of Hong Kong, Singapore and Australia by
Flinn & Sullivan in 2006 showed that Singapore law did not have takeover provisions and that
the Hong Kong REIT formation regulation was inordinately lengthy. These are aspects that the
SSE would be well advised to avoid.
The Issues in China
The real estate business in China started with the expansion of the residential market
following the 1998 reform of housing. This jump slightly predates the 1999 reform of the
financial sector and opening of the banking sector to foreign banks. As a result of the booming

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residential housing market, the residential mortgage market also took off. In 2007 foreign banks
were permitted to offer RMB services to retail clients, including housing mortgages. Up to this
point, the “big four,” as the largest Chinese state-controlled banks are commonly called, were the
main sources of funds for private borrowers. Deng (2005) explains the history, “The first
residential mortgage loan in China was actually issued by the China Construction Bank in 1986
[but the market grew very slowly until 1999-2000]; by the end of 1997, total outstanding
mortgage balance in China was only around RMB Yuan 22 billion. By August 2002, the total
outstanding balance of the residential mortgages reached RMB Yuan 763 billion” (p. 118).
According to the People’s Bank of China third-quarter 2007 monetary policy report, over the
five years between 2002 and 2006, the total investment in China’s real estate sector had reached
USD657.6 billion (RMB5.3 trillion). National real estate investment in the first three quarters of
2006 reached USD165 billion (RMB1.3 trillion).
One of the issues that the Chinese government has been grappling with since 2004 is that
in large cities such as Shanghai and Beijing property prices are much higher than the average
citizen there can afford—a situation referred to as an overheated market. The government seems
to suspect that speculation by wealthy domestic and foreign investors seeking the advantages of
international diversification are factors in pushing up prices. While legal restrictions limit the
acquisition by foreigners of real estate and securities, foreign funds do not stay away from China.
Instead, they seek loopholes and alternate mechanisms that enable them to participate in the
rapidly growing China market. Foreign investment firms are permitted to develop real estate but
are not permitted to list their companies on the China markets. Among the restrictions placed on
foreign property developers is that foreign currency cannot be imported and bank loans can only
be used to finance up to 60% of the purchase cost of land plots. Therefore some foreign

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developers and equity investors form local business entities and rely on Chinese Yuan generated
from its operations and domestic bank loans to expand and acquire further pieces of land for
development. In July 2006, the Chinese government issued “Circular 171” prohibiting foreign
individuals from purchasing property in China (Chen, 2007). One primary residential unit for
foreigners was permitted later. In June 2007, a brand new regulation on property rights took
effect. So, while property rights were clarified, foreigners were, and still are as of this writing in
2010, discouraged from investing. The ostensible reason is to cool an overheated property
market, but another could be protectionism. As a developing country, the government would
want not only to protect its prime, real property from being bought up by foreigners while
domestic buyers could not afford it, but also to protect its emerging capital markets (Tan, 2004).
Another of the issues which the Chinese government is sorting out is that accounting
standards and real estate and REIT valuation methods differ from one region to another and
comparisons may be misleading (Ooi, Webb & Zhou, 2007). The fact that international real
estate performance indices are not standard must be taken into consideration (Hoesli & Serrano,
2009). Investors and professionals typically compare performance of securities and other
investment vehicles within the industry, across time, across countries and occasionally across
industries. Once China has harmonized its accounting principles and implemented International
Financial Reporting Standards (IFRS), realistic comparability will be achieved (Andrew &
Zhang, 2010). The case of China is exacerbated since it needs to harmonize standards used in the
different parts of Greater China (including the mainland, Hong Kong, Macau and Taiwan) while
at the same time comparing its extant standards to the (increasingly less favored) GAAP and the
IFRS. Each of the Greater China countries has different historical, legislative and educational
backgrounds and practices that differ from one country to another (Lin, 2007). For example, Lin

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(2007) revisits Taiwan’s 2001 Appraisal Techniques, the 2002 Financial Asset Securitization
Statute, the 2003 Real Estate Securitization Statute, and the 2006 Ordinance of Real Estate
Appraisal Techniques in Taiwan. He describes the overlap of seemingly straightforward real
estate valuation with the creation of financial instruments and the evolution of these two areas of
expertise into one of global relevance. The comparison of the Taiwan regulatory environment to
those in the U.S., the U.K. and Canada shows that the lack of a solid regulatory environment
could lead to “disorder” in the markets (p. 298).
One of the most complex issues is that of taxation. Historically, China has not had
property tax, that is, a tax on the capital gain realized upon sale of real estate until 2006. The
purchase and sale of physical property involves stamp duty and land appreciation tax (LAT).
Real property can be bought and sold, however the land remains the property of the state. The
owner of the asset obtains a renewable right to use the land for a given period of time. The land
can appreciate in value, and this is taxed very highly through the LAT, up to 60%. Set against
this background of China property law, most REITs throughout the world follow the regime set
out in the USA and Australia and do not pay income tax. They are exempt from corporate
income tax since they pay between 80% and 100% of their income, usually derived from
commercial rents, as dividends to their shareholders. China’s economists and tax specialists are
undoubtedly working this out among other thorny issues.
In addition to its lack of fully formed regulatory environment, the Chinese government
appears to fear the unforeseen effects of new investment vehicles and this may be one of the
reasons for its apparent hesitation to permit REITs. Throughout 2009 and 2010, the subject of the
overheated real estate market appeared in Chinese newspapers on a daily basis. This situation
prevailed for a variety of reasons, not least of which was the memory of the implications of real

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estate on the economic crises of 1997-98 in Asia and of 2008 in America, but also the possibility
that bubble-like prices in the luxury property sector could cause social unrest domestically. In
China during this period, developers persisted in building luxury properties for quick capital
return. Developers were not incentivized to produce affordable housing but at the same time
rapid urbanization occurred and incomes rose across labor market segments but not yet nearly
enough to afford the available luxury properties. In fact there is a shortage of affordable housing
for the 15.4 million low-income urban households; in Beijing, the average housing price per
square meter is equivalent to seven months’ salary on average.
The Process Involved in Creating a New Framework
In order to ensure a smooth process with little or no ripples in the economy from
introducing any new investment vehicle, it is essential that the regulatory framework and the
instruments introduced on the stock market be properly constructed from the beginning. The
government, in particular the Central Bank, CBRC, CSRC and the SSE clearly have a mighty
task ahead. Since caution is advised, a stepwise approach to introducing such a new investment
product in China has been proposed. Examples of Taiwan and Malaysia both having introduced
REITs in abortive attempts in the 1980s, show that “imperfect regulation” (Lin, 2007, p. 298)
and “local structural and regulatory factors” led to failure (Acheampong, Ting & Newell, 2002,
p. 110). “Turmoil arising among investors, issuers, and governments led to disorder in the real
estate and financial markets. Thereafter, the Taiwanese government has been very cautious in
regulating the mechanism for investor protection” (Lin, 2007, p. 298). In the case of Malaysia,
the government “liberalized its REIT framework in early 2005” (Newell, Ooi & Sing, 2006, p.
207). This new regulatory framework greatly facilitated success of REITs in Malaysia.
The Hong Kong securities exchange regulator also modified its regulations in 2010 in

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response to evolving market requirements. This was necessary because companies exploiting real
estate in the mainland—that adhere to REIT characteristics—may list as REITs on the Hong
Kong exchange. The regulations in question pertained to securities with mainland real estate
products. The special features of mainland land ownership certificates, land use rights, etc.
required modification of trust takeover and delisting regulations. Land in China belongs to the
state; property developers have a licensed right (renewable) to use the land. The business culture
and legal heritage of Hong Kong is essentially British common law, and mainland China land
use certificates may not be readily available. According to the new regulations in Hong Kong,
this fact may be mentioned as a risk factor in the listing prospectus. As the process of creating a
framework for implementation of REITs evolves, barriers such as the lack of proper
documentation (which may prevail for historical reasons) need to be overcome. Clearly, the
development of a REIT regime with sound legal and regulatory infrastructure is a process that
needs to be tailored to China’s particular domestic circumstances. The government also needs to
instill proven best practices, transparency and ethics in the market. International best practices,
eventually set down in the regulations will be driven by the need to accommodate the various
market participants’ requirements, and to support eventual positioning and internationalization of
its financial activities and the stock markets (Newell, Ooi & Sing, 2006).
The legal and regulatory infrastructure includes financial legal frameworks (such as
bankruptcy codes and conflict resolutions mechanisms between creditors and debtors),
supervision, accounting, auditing, and the rules, practices and professions that go with them, as
well as financial corporate governance institutions (Renaud, 2003 and Deng & Zhang, 2008). In
the process of developing its emerging economy, China is fostering and pro-actively
implementing these and other aspects such as information availability, flexibility, property

15. 16
intermediaries and professions. Legal issues are concerned with the creation and evolution of a
host of institutions, laws, regulations, rules and interested parties within the government. “In
very simple terms, the institutional structure of any market might be viewed as the set of rules
governing the operation of that market” (D’Arcy, 2008, p. 2). Establishing such a structure is a
complex and wide-ranging yet delicate task and the structure must also be sustainable as the
actors in the market change and the institution becomes internationalized.
Until standardized information and the tools to convey it and evaluate it are fully
available, and the full legal and regulatory infrastructure is in place, the government may
introduce the REIT in stages. As a first step, a REIT-like instrument might only be made
available to institutional investors, according to an article in the 2009 International Financial
Law Review. Rather than being publicly listed right from the start, a trust vehicle may comprise
Special Economic Zone (SEZ) properties and be traded on the inter-bank market. Based upon
casual observation in China, the government typically examines and analyzes overseas practices
in detail, debates prospective actions internally, then issues plans and proclamations and receives
comment before promulgating law. Initially, trial balloons and test cases are permitted where
only certain qualified actors may participate in specified geographical areas. New institutions are
implemented in a relatively confined geographical and economic context, such as in a SEZ or
Special Administrative Region (SAR) for a period of observation before going nationwide.
Domestic market acceptance is essential well before inviting foreign actors into the market. The
entire stepwise process may take years. Often times Shanghai, the securities exchange of which
lies within an SEZ, and Hong Kong which is an SAR, are the trial platforms.
Costs of Implementing a New REIT Regime
In analyzing the costs involved, it is important to realize that real estate is an important

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asset class in the economy, even leading the business cycle (Green, 1997). Given its importance,
actors in the marketplace need “area-specific information that is by nature subtle and hard to
communicate” and the lack of it may have important consequences on valuation and hence on
the economy as a whole (Ambrose & Lee, 2009, p. 484). Designing solutions to standardize
practices and developing the regulatory framework invariably generates compliance costs,
including for example, expertise accreditation of market participants. Costs also include the
standardization of accounting treatment and valuation techniques, auditing and financial
corporate governance, as well as the technical tools, rules, practices and professions for these
(Deng & Zhang, 2008; Ooi, Webb & Zhou, 2007; Renaud, 2003). “Foreign ownership of
companies, limits on the scope of services … barriers to hiring non-national personnel, and
controls on flows of both information and capital and also the repatriation of profits” are other
costly barriers to overcome (D’Arcy, 2008, p. 7). In addition to formal barriers are informal ones
including “traditions of real estate practice and culture… ingrained attitudes towards the status of
the specific activities, and language” (p.7). Such business and cultural barriers have been reduced
in Europe, and will also need to be addressed in China and harmonized throughout Greater
China. These ethical or cultural issues also result in costs to be borne by the market participants.
Another costly barrier to overcome is the development of indices for recording performance and
for comparisons. In the U.S., relevant indices are NCREIF, National Council of Real Estate
Investment Fiduciary’s Property Index (NPI) and National Association of Real Estate Investment
Trust’s equity index (NAREITEI) which is the counterpart of NPI for U.S. public real estate
(Chen & Mills, 2006). Equivalents will have to be established in China. Furthermore, the
Chinese REITs will necessarily be compliant with the FTSE EPRA/NAREIT global index of
over 300 public real estate companies.

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A stepwise process for developing the regulatory environment and the REIT instrument
could proceed through: analysis of domestic actors’ characteristics and requirements; analysis of
overseas institutions; issue preliminary plans; internal debate; digest feedback; issue
proclamations; observation and coordination; and finally promulgate regulations. The actors
involved in this lengthy process range from academic institutions and professional associations
providing expertise, through local administrative bodies all the way to the central bank and the
State Council of the government itself. The cost is large in terms of time as well as manpower
and intellectual capacity. The parties concerned, in particular the Central Bank, the CSRC and
the SSE can modify existing institutions using examples of other countries and take into account
the peculiar circumstances in the Chinese environment. Even the failures of some cases are
especially useful because they show pitfalls to avoid. With these advantages, as well as the
tremendous intellectual power that is available and focused at the key parties involved, the costs
may not be as great as those borne by a country simply starting from scratch and making abortive
attempts at creating the right framework for public REITs.
While critics may argue that development stability, quality property products, and market
openness are prerequisites to a successful REIT regime; this author would argue that waiting for
such prerequisites to emerge is the most costly option. These are elements of a mature economy,
and in the process of emerging, China is fostering and proactively implementing these and other
aspects, such as information availability, flexibility, property intermediaries and professions.
They all must be engendered together with user and investor opportunities (Chin, Dent &
Roberts, 2006). The categories of actors and fields of endeavor include marketing, finance,
accounting, tax, management, leadership, legal issues, ethics, global dimensions, and policies.

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All of these are associated with aspects of the process of implementing REITs in China, as
shown in the table below.
Table 1
Costs Associated with Implementing a New REIT Regime
Problem Solution Cost Factors Element Involved in
the Solution
Observe and test Draw conclusions - Long span of time Academics
REIT regimes in from lessons learned, conducting studies Management
other countries extrapolating to China - Academics feedback to
policy makers is lengthy
Legal, financial, tax Create new systems to - Long span of time Legal
and regulatory support future - Manpower of numerous Finance
framework need to investment vehicles government departments
be changed on the market and banks
Non standardized Harmonize existing Intellectual capacity of Accounting
accounting standards with professional bodies and
practices and lack international standards exchange regulators
of performance and create new indices
indices
Best practices New reporting Costs of compliance by Standards Bodies
absent or standards, governance businesses Professional
inconsistently and transparency rules Associations
applied
Formal and Create harmonious Costs for market Leadership
informal barriers policies participants Policy-makers
Nature of property Influence investor Potential cost to general Securities exchanges
investment behavior through tax smooth operation of
activities for short- and other incentives economy
term capital gain
Long span of time Apparent inaction Opportunity costs --
while vehicle is
unavailable to
individual investors
Market acceptance Trial projects in SEZ Contingency costs Marketing
and SAR
Staged Implementation Plan

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First Stage – The Pilot REIT
The first stage would limit investors to institutions such as insurance companies, banks,
pension funds, and wealthy corporations (Chen, Sun & Wang, 2009). These institutions have
long term goals, less speculative money, “more understanding of the product and better risk
management than the average domestic retail investor” and supposedly better than foreign
speculators (Lee & Leung, 2010). An unlisted vehicle would be made available for purchase in
large, en bloc transactions on either the non-stock OTC electronic market or the inter-bank
market, or both. The process of implementation entails extensive modification of existing
regulations. The Central Bank and the CBRC need to approve any securitisaton. The CSRC
controls the OTC non-stock electronic market and the CBRC regulates the inter-bank market.
Furthermore, both the CSRC and the CBRC regulate existing forms of trusts that could possibly
serve as platforms for REITs, respectively the specific asset management plan (SAMP), and real
estate trust investment schemes (RETIS). A security fund is a third type of investment vehicle
that may possibly serve as a better platform for evolving a REIT. This is a mutual fund the shares
of which already trade on the open market. It is an instrument managed by a licensed fund
management company, currently restricted to high net worth individuals. These are also
governed by the CBRC. The current form of securities fund holdings could eventually be
expanded to include real estate; the fund could then be listed and traded publicly.
Another key player in the transformation is the China Insurance Regulatory Commission
(CIRC), which governs insurance companies. CIRC modified its rules in early August 2010 to
permit insurance companies and pension funds to invest a limited portion of their holdings into
private equity and real estate. China Life Insurance and China Pacific Insurance, and Ping An
Insurance already seek investment opportunities in commercial property, as well as debt and

20. 21
shares of non-listed companies as they plan to diversify their investments. These institutions are
banned from developing properties directly (Colins, 2010).
New entities, funds or trusts, comprised only of rental revenue-producing real estate need
to be created. The physical properties need to be identified, valued and examined for compliance
to traditional REIT parameters. Next, proposals to amend the rules for SAMP, RETIS, and
securities funds as well as their respective trading platforms need to be drafted and submitted by
their regulators for review by higher authorities, namely the People’s Bank of China, relevant
ministries and the central government. Tax neutral policies, which are not yet available on
securitized products in China, also need to be created and approved by the Ministry of Finance
and the State Administration of Taxation. Currently, SAMPS (and fixed-income securities) are
traded for short-term, while RETIS raise project based financing and bridge capital (raising debt
is not permitted) as interim financing for property developers. If either of these vehicles is used,
this stage is estimated to require 18 months, including the difficult modification of tax codes.
Interim Stage – The Development REIT
In the second stage, the trust could be permitted to use a small portion of its revenue to
engage in property development, rather than paying most of it to investors as returns. Cities in
the interior of China need infrastructure and other development, and these are often overlooked
by property developers which seek high profits in wealthy costal and capital cities. A
development REIT would be permitted to re-invest a portion of its proceeds in new development
projects, not only pay out rental income as dividends. Furthermore, traditional REIT
characteristics include numerous shareholders that own units or shares of the trust. Hence, the
interim vehicle needs to be created in such as way that its revenue use, ownership and capital
structure are clearly defined. This stage is estimated to require eight to ten months.

21. 22
Regardless of the asset type, professional asset management and management of the
trust’s physical assets and finances are needed. A corresponding monitoring system including
licensing and periodic re-certification are also needed. As of 2010, there is no licensing system
for asset management in China. These standards can be readily borrowed from more developed
countries and international bodies. Although admittedly the time to hone such skills and develop
experienced fund managers will require much longer. As a start, imitating international
certifications bodies is estimated to require approximately six months.
Final Step – The True REIT
A pre-requisite according to traditional RIET structure is that the property must be
profitably revenue-producing continuous for at least three years. There are few such properties in
second-tier cities, and these could emerge during the third and final stage. “The ideal asset types
would be large-scale rent-generating properties such as offices, shopping malls and serviced
apartments” as well as industrial properties (Chen et al., 2009, p. 154). For the last and final
stage, the steps leading to public listing have been summarized by Bedford (2010) of KPMG the
following table:
Table 2
The Path to REIT Listing with Key Steps to Consider
Steps Key Issues
1. Identifying the portfolio  Asset valuation
 Financial analysis on future income
stream projection
 Financial, legal and tax due
diligence

22. 23
Steps Key Issues
2. Structuring the portfolio from  Operating and running costs of each
acquisition, holding and exit structure
 Cash flow assessment
 Income support arrangements
 Repatriation of income
 Tax planning to minimize tax
leakage
3. Preparing the portfolio for REITs  Controlling interest in REITS
 Tax efficient management fee
structure
 Financial modeling and
determination of optimal financing
structure
 Fair value assessment
4. Submitting the listing application  Determining time and place of
and obtaining regulatory approval listing
 Preparation of the listing documents
 Resolving comments raised by the
regulators
 Accountants report, comfort letters
5. Roadshow  Investor relations
 Yield forecasts
 Future funding
 Post-listing strategy
6. Listing  Compliance with the Code, Listing
Rules and trust deed
 Risk management and operational
control
 Corporate governance
 Ongoing audit and tax compliance
 Subsequent acquisitions
Source: Bedford, “China’s Trust Sector: The Next Chapter”, 2010.
A staged introduction conforms to the traditional pattern of the Chinese government. It
enables simultaneous development of regulations and policies while testing the vehicle at the
same time. If this policy were to be implemented, it will address the pent-up demand for insurers
to invest in real estate, albeit indirectly and through a less volatile vehicle. Currently, in China
and in Shanghai especially, real property is far too volatile for large investors. Subsequently, the

23. 24
second stage would open up REITs and could help draw retail investors away from property
speculation and towards a longer term, steady return typically provided by REITs.
The process of implementation comprises not only the legal, financial and economic
actors, but some pure political actors as well. The English language national newspaper, the
China Daily, reported on April 26, 2010, that the unlisted REIT vehicle may be made available
in either Shanghai or Beijing (Lee & Leung, 2010). There is rivalry between the two cities and
both are eager to pave the way. Actively operating, government-backed properties in free trade
zones, such as ports facilities, logistics centers and warehouses, could be put into the first pure-
China REIT be they in Beijing’s or Shanghai’s nearby port cities (Lee & Leung, 2010).
While the solutions for REITs and other investment vehicles are being formulated, the
retail investor and property developer endure opportunity costs to spend their savings and raise
financing respectively. This situation is in part responsible for the rising prices of real property.
During 2010, the government has been trying to cool the rise of real estate prices by instructing
banks to curb credit to speculative buyers. This places a high onus on retail banks which,
nevertheless, may exercise subjective judgment and make selective decisions.
The final policy implication to mention here is the issue of potential social unrest. This
can be caused by lack of affordable housing for the masses. This is yet another reason that the
government policy must quickly provide investment vehicles to address pent up demand of
investors. Throughout 2009 and 2010, the Vice Premier and Minister for Housing and Urban
Development are featured in the news calling for more affordable housing to be built. For
example, on August 22, 2010, Vice Premier Le Keqiang “called on local government to bear
major responsibility for affordable housing construction, diversify fund raising channels to

24. 25
obtain more investment, arrange for sufficient land supplies, and ensure transparency and
fairness in the distribution of affordable housing” (Xinhua, 2010).
Conclusions
In order to ensure a smooth process with little or no ripples in the economy, it is
absolutely essential that the regulatory framework and the instruments introduced on the stock
market be properly constructed from the beginning. The macroeconomic policy objectives of
long-term growth and stability could be severely affected by errors and omissions in the
implementation. Three major steps along this process can be demarcated as the presence in the
market of: a pilot vehicle—the restricted institutional REIT; the development REIT; and the
publicly traded REIT. The prerequisites for the first, restricted vehicle have been discussed
extensively in this article. The trust laws, tax regimes and regulatory and professional feature
development are benchmarks in the process. The final objective is to create a truly liquid, tax-
neutral, stable and publicly traded real estate securities instrument. The whole process is likely to
take three and a half to four years. The Chinese government itself, in particular the CBRC,
CSRC and the SSE, have far-reaching objectives. China aims not merely to be on par with the
rest of the world in terms of its housing policy and investment markets, it aims to rival many
established financial markets.
Due to recent volatility of real estate prices and related securities in the U.S., it is useful
to compare the performance of REITs to the overall stock market in a volatile economy in order
to assess the value and stability of the REIT instrument. Clearly, the organizational form, tax
status, regulatory framework and investment performance of real property and securitized
property are quite sensitive to economic conditions. Evidence shows that the REIT is an
investment vehicle satisfactorily lending itself to the demands of investors primarily in

25. 26
developed economies with mature capital markets. In developing countries, such as Malaysia, it
met with limited success until pertinent regulations were liberalized. Hong Kong and Taiwan
have also refined and streamlined their regulations.
China has resisted the introduction of the REIT vehicle for several reasons related to the
maturity level of the economy and, specifically, to the presence of pertinent legislation and
regulatory mechanisms. Only in October 2007 did China abandon the traditional Dian Quan
system and introduce a code of property law that conforms to a (German- and Swiss-style) civil
law system. Furthermore, accounting standards, technical tools for securitization and valuation
(upon which securitization naturally depends) and capital market mechanisms are not yet
sufficiently standardized globally, let alone within China. 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. As a result of all
these factors, it will be some time yet before we see the REIT in China.

26. 27
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