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On December 1st, the primary securities regulator announced a new pilot program for commercial real estate investment trusts (REITs). This initiative aims to enable the securitization of shopping malls, hotels, and office buildings, expanding financial avenues for the sector.
The regulator recently released a draft proposal for public feedback, outlining the framework for this pilot program.
Commercial REITs are publicly offered investment funds backed by income-producing properties, allowing investors to earn returns through rental income. While infrastructure REITs are already established in the country, commercial-property REITs are a new development designed to utilize the substantial stock of commercial real estate, which has faced challenges due to the sluggish property market.
The draft consists of eight main provisions focused on product definitions, fund registration procedures, management practices, and enhanced regulatory responsibilities. The regulator highlighted that in mature markets, assets such as commercial complexes, retail centers, office buildings, and hotels serve as essential backing for REIT products.
The proposal specifies that commercial REITs are defined as closed-end, publicly offered securities investment funds that acquire stable income streams from holding commercial real estate and distribute profits to investors. Fund managers must conduct thorough due diligence on potential properties and collaborate with qualified professionals for property valuation, legal, audit, and other expert services before seeking approval to launch a REIT.
The draft underscores the importance of clearly delineating the roles of fund managers and professional institutions, emphasizing strict adherence to regulatory and professional standards. It also calls for enhanced oversight responsibilities, outlining the duties of regulatory agencies in supervising, monitoring risks, and resolving issues related to commercial REITs.
The regulator stated, “By incorporating international practices, tailored to China’s specific context, and adhering to a market-driven, law-based approach, the timely rollout of commercial REITs can better enable REITs to function effectively. This will facilitate a new model of real estate development and further improve the quality and efficiency of multi-level capital markets in supporting the real economy.”
As of November 27th, the country hosted 77 REITs, raising approximately 207 billion yuan (around USD 29.2 billion), with a total market value of about 220.1 billion yuan. Since last year, the CSI REITs Total Return Index has surged by 22.5 percent, reflecting the growing significance of REITs as an investment category.
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