As some U.S. REITs have expanded their global operations, one market that looms as a sleeping giant is China. One only has to look at rising commodity prices, including oil, steel, etc., to see the impact China has on worldwide markets. These developments are starting to catch the attention of real estate investors, especially some industrial REIT operators who have been among the first REITs to test the waters.
AMB Property recently added a new local office and senior executive based in China, which is expected to be the first step in building relationships and learning local policies and customs that will be necessary to be effective in the market.
"Explosive growth in China's economy and its position as a world trading partner are creating significant customer demand for distribution facilities that meet international design specifications," says Hamid Moghadam, AMB Property chairman and CEO.
"Our logistics facilities' experience at global ports and airports is of interest to both government and corporate real estate leaders who are seeking partners in the planning and building of China's emerging logistics real estate market," Moghadam adds.
AMB isn't alone in its interest in China's industrial real estate market. ProLogis intends to acquire a 258,300-square-foot distribution facility leased to Hymall, an operator of Chinese hypermarkets. ProLogis also secured the exclusive right to develop approximately 1 million square feet of distribution facilities in the park.
REIT-Type Structure
Though 20 or so countries now have or are considering REIT-like structures, a similar development in China is still some years off, according to industry analysts.
"The barrier to entry into China is China," says Jack Rodman managing
director of Ernst & Young's Asia Pacific Financial Services Practice. "Anything that is new takes a long time for approval. If there is not an existing regulation or precedent, transaction approvals take a long time. Even something as simple as registering a company that just won an auction to buy non-performing loans takes an inordinate amount of time."
Having skilled legal and financial advisors with experience dealing with the
regulatory agencies, the lag time can be reduced, but not greatly, according to Rodman. A securities offering of real
estate would require coordination of
so many agencies, from securities,
tax, Ministry of Finance and Commerce, foreign exchange, etc.
"This would be a challenging endeavor even for the bold at heart," Rodman says.
Beyond the government, Rodman lists these specific barriers for U.S. and other foreign REITs looking to do business in China:
- The rating agencies are getting up to speed in China, but are a long way from rating various collateralized instruments. The tax structure differs and may not afford the same REIT benefits to investors.
- The commercial banks are sitting on every residential loan they ever made.
- There are no commercial conduits.
- The auto loan industry is experiencing increasing default rates. It's unlikely that any of these assets will be securitized.
"The current 'buzz' in China is 'securitization,'" Rodman adds. "It is not well
understood, and it is being applied to
non-performing loan resolutions. In fact, there have not been any mortgage-backed securities, commercial mortgage-backed securities or other collateralized securitizations in China. However,
Credit Suisse First Boston did a small securitization at the Ningbo Branch of
Industrial and Commercial Bank of
China as a 'pilot project.'"
There is plenty of real estate in China that could be securitized, Rodman says. The China Banking and Regulatory Commission is trying to reduce bank exposure to real estate and sending directives to
reduce real estate lending. This will probably create disintermediation in the real
estate market and create an incentive for owner/developers to look at REITs as a financial vehicle to market their portfolios.
"There are some really big owners in the market who have never had pressure to sell assets and the REIT could be an
attractive vehicle," Rodman says. "However, this could be a few years away."
