REITs may come as home prices fall

Attractive due to smaller returns from property development

China's high property prices deter the launch of the real estate investment trusts (REITs) that are popular in developed economies, experts said at an investment forum in Beijing on Wednesday.

REITs are a specialized form of fund that allows investors to own a tranche of a group of real estate properties and get returns through the collecting of rents in these properties.

"The conditions for REITs to land in China are not mature, as it is widely believed that China's assets are highly priced, and the REITs' investment return is not comparable to that from property development," Liu Yueqiang, a board director of Beijing-based Orizon Capital, said at China Annual Investment Conference 2014.

The annualized investment return for real estate development is as high as 20 percent, while "rent-based REITs" annual return is only 5 to 7 percent, even in the tier-one cities, said Wang Gang, secretary-general of China REITs Alliance.

Trust investment in China bearing implicit guarantees of investment returns also make existing investors reluctant to turn their eyes to relatively low-risk REITs products.

With home prices starting to fall, it may be a good time to consider the new investment tool which enables the public to share a stable cash flow by owning a portion of properties, Wang said.

"The golden era of the property market is gone and price correction is expected to continue because some key factors that used to support the soaring home prices are weakening," said Wang Ke, managing partner at Beijing-based Top Agency, a wealth management company that provides service to high-net-worth individuals on property investment.

Tight capital control that led to over-abundant liquidity, cheap financing costs and the rarity of urban resources have all fueled home prices in the past, but things have changed now, he said.

China is lifting capital controls and encouraging corporations and individuals to invest overseas which may funnel some capital flow toward overseas market, he noted.

Developers are finding it increasingly difficult and costly to finance nowadays as the interest rate further liberalizes and becomes more market-driven, and the Chinese government shifts focus to provide more affordable housing to low-income people, all of which mean the property market will cool down, Top Agency's Wang said.

The country's once red-hot property market has shown signs of cooling since early this year, particularly in residential real estate. Even tier-one cities such as Beijing and Shanghai have seen sluggish sales and price slumps recently.