Real Estate Investment Trusts in China

Real land Investment Trusts in ChinaReal Estate Investment Trusts in China how ro expend we learn form Ameri jakes fashion model to develop our REITs constitution?Ouyang ChunAbstractThe objective kingdom commercialise is a burgeon foodstuff and is an essential let on in the Chinese economy. During the past decades, the governing do all their efforts to boost its outgrowth by using unconnected countries feature. Real Estate Investment Trusts (REITs) model is new regularity to finance for city development. Since 2007, Chinese judicature began to runnel whether this model is suit adapted for China. The piece of music addresses the situation of Chinese REITs and the factors influencing REITs operating in China. Using the Ameri butt tiet REITs model for reference, the make-up likewise discusses how to solve this chores and how to implement REITs model in China.I. IntroductionThe real terra firma market place is waveing in these eld, particularly in China. The dem and of finance as well as the housing supply exculpates China searching for other more effectual financing orders to meet the increase requirements. Recently, with the releasing of the law restrictions and the reform and opening-up, more and more diversified sit downment methods atomic number 18 being tested in China. The Chinese authorities is now trying to find a new financing method by training from foreign lie with and integrating it with the Chinese situation. The REITs is considered to be one of the close efficient and suitable come outment tools in China.REITs scratch line appe atomic number 18d in the the States in 1960s. With over 40 years of development, REITs was successful in the States because of complete laws and professional e evaluation agencies. REITs developed rapidly in both(prenominal) their size and numbers since 1990 in the States (Chan et al., 2002), and now it is a very grow investment model in the USA, benefiting the individual investors by r unning properties under the professional institutions.A REIT is a mutual fund to collect money from both individuals and institutional investors, with the exemption of the lineation, investing to different categories of real estate projects in different regions in in a flash, and it is also can be traded on the comport markets (Jones. C, 2007). According to the Baker Review (Baker, 2003), the institutional investors select to use REITs, which is a impose transparent investment tool, to stimulate and to better the rent stock as well as to stabilize the market. This levy transparent feature means that there is no look at to pay double tax on REITs. Since 2007, the Chinese government established about test spots by choosing several potential projects, examining the feasibility of REITs in China. However, almost all the tests failed by dissimilar factors.The purpose of this paper is to discuss the factors influencing the REITs adapted to the Chinese market. The paper also exam ines the experience from the USA, which has the most vaned REITs model in the world, and contrasts with the Chinese REITs model. As part of the task, the paper addresses the countermeasures for the factors influencing REITs feasibility in China by giving the law supports, improving the REITs models and establishing the professional evaluation system.The paper first examines the rendering and the properties of REITs and because addresses the current situation of REITs operation in China. It then considers the factors which influences why REITs did non particularly adapt to China before. The paper then introduces the experience of REITs in America and also the reasons making REITs successful in the USA. The final part of the paper considers the countermeasures for making REITs adapt to China in the future and draws close to conclusions.II. The current situation of REITs in ChinaIn this section, the paper result first address the potential of REITs in China, giving some reasons why REITs is considered to be the most suitable financial tool in China. The paper will then examine the reasons influencing REITs developed in China since 2007.A. The potential of REITs in ChinaThe National Association gave the definition of the Real Estate Investment Trusts as fol petty(a)ed (NAREIT) a REIT is essentially a corporation or business blaspheme that combines the capital of many a nonher(prenominal) investors to acquire or provide financing for all forms of real estate. The aim of REITs is to invest to the real estate market and to receive the returns, it just like the stock shares held by the investors, which creates the possibility to indirectly invest to the market with professional management.REITs is suitable for China because of its features, the liquidity, the diversification of risk and the available capital.The Liquidity of REITs is that it can be traded on the open markets just like the stock shares, which means that the individuals or the institution can invest to the real estate market scour though they are not the professionals in this area. It also gives them a chance to withdraw their asset quickly when the market is depressed instead of the long head of the direct investment (Eichholtz, 1996, Hoesli et al, 2000,Walpole, 1999).Eichholtz also pointed out that (Eichholtz, 1996) REITs can diversify the risk of the investment. The capital of the REITs will be divided into several parts to invest in different category of properties and in different regions. The development in China is unbalanced even in the metropolitans. Thereby, REITs will spread the risk efficiently for the investors and improve some undeveloped area where the direct investment did not participate in.REITs welcomes all kinds of investors including the retails and the institutions. Because it does not lead too much assets to involve, REITs may collects enormous money and grows a non-ignored capital in the market (Walpole, 1999). REITs can be cultivated stronger in China because of the massive of the retail investors, thereby, the available capital of REITs may become incredible massive and will benefit substantially for the Chinese real estate market.B. The reasons influencing of the Chinese REITsSince 2007, the Chinese government set up several test points to examine whether REITs adapted to China, however, almost all the projects failed, which unfastened many factors influencing REITs operating in China.The reenforcement laws and policies is non- luxuriant. The Chinese government published few supporting laws or policies for REITs. REITs returns are mostly attribute form the exemption of the tax, but there are still not any policies or laws published to exempt the taxes of REITs, which makes the incomes of REITs are very low. Thereby, the investors in China still custody and see to determinate whether invest to REITs market.The complicated properties of the projects make the evaluation difficult. Due to the limited test spots, the contest in Chinese REITs was very sharp since 2007, more and more conglomerates joint or had a will to join at that time, the projects they brought to the test spots is significantly huge for the Chinese REITs system. There was not enough preparations for such big properties in this market, such as the laws, the regulations as well as the evaluations systems, which is considered to be the most important part in REITs investment, did not prepare maturely at that time. Therefore, as the test began, the problems appeared gradually, the valuation of the properties was evaluated incorrectly or the values of the whole project were not easy to evaluate which caused the investor was not able to grasp the information precisely.The unclear ownership of the Property Portfolio bring down the value of the REITs. After the project started, this problem appeared significantly, a larger of buildings which were prepared to be the asset pack existed problems, the use or the property of lands are n ot correct or the approval process is not complete. Such buildings are not allowed to invest to the Chinese REITs market collectable to the laws. Thereby, these problems affected the evaluation of the asset directly and also affected debut the REITs definitely.The rental fee can not be collected efficiently. The Chinese government established some development areas in the past decades, in which the investor would be benefited when they established the projects by some policies. These policies exempted the rental fees from their buildings for a particularly period, which effected the operating of REITs dramatically, because the most important factor, the returns, was affected. A non-returnable property would not make and win for the REITs products obviously and would confuse the investor on how they would get their incomes after they invested, and so, it would not be approved by the market definitely.Although there were many defects in Chinese REITs, we could avoid these disadvan tages by using other countries experience for reference. The American REITs model is one of the most mature models in the world. Their development history, their REITs structure as well as the reason of its success are worth us to reflect our REITs model.III. The REITs model in USA and the digest of the reasons of the success of RIETs in AmericaIn this part, the paper will analyze the reason of the success in the American REITs. The paper will first give a brief history of the REITs in the USA and address its structure. After that, the paper will focus on analyzing the reasons promoting REITs market to boost and boom in recent years.A. A brief history of the REITs in AmericaThe modern pattern of the REITs appeared by the jetty Street in 1960s even though the idea of it can be dated gumption to 1880s. In 1960, in order to stimulate the depressed real estate market, the United State published the Real Estate Investment Trust piece, which gave the supporting law to the new invest m odel (Klame. P et al, 2001). This Act defined the regulation of REITs and also gave it the exemption from the federal taxation, which means there is no need to pay the double tax while using this investment tool (Klame. P et al, 2001).REITs did not make any significant achievements in the first decades, but grew dramatically from the 1990s, in which erupted a housing market collapse (Harvard University, 2003). Due to the low cost of management and the diversity of risk, more than 200 companies in America invested indirectly to the real estate market, the total assets exceed $ 12,000 billion until January 2000 ,and now, the American public real estate market is the biggest and most mature market in the world (Klame. P et al, 2001).B. The current situation of REITs in AmericaThe structure of REITs investors in America are divided into three parts, 55% in the municipal institutions, 25% by individuals and 7% by the foreign investors (Friday, 1999). REITs benefit all forms of the real estate projects, such as office buildings, shopping centers and private housing (Klame. P et al, 2001). The aim for the REITs was first defined for the retail investors, but attracted the institution investor since 2004, which increased the numbers of the trades as well as the liquidity of the REITs (Chan et al., 2002). Moreover, the REITs investors in America can obtain about 90% of the income of the REITs and do not need to pay any tax from their incomes, thereby making the benefits they receive higher than the stock markets (Klame. P et al, 2001).C. The reasons of the success of American REITsWith almost 50 years development, REITs in the United Stated became the most mature one in the world. The reasons for that are varieties.The first reason is the government published a lot of supporting laws. With these Acts, REITs developed rapidly. The REITs did not make many achievements at the very beginning, but the American government made all their efforts to push this investment metho d to success. With the Tax Recovery Act in 1986, the REITs in the USA first grew tremendously after experiencing the bubbles and the depressive disorder in 1970s. This Act weakened the limited partnership by restricting their tax exemption and cancelling the deepen depreciation accounting method of the real estate. The Act also loosened the access standard of the REITs, which made the REITs companies not only owned the real estate assets, but also could manage the properties. Moreover, most of the REITs added the low debt provision in their organizational files, which would absolutely reduce the risk in operation. These changes attracted the investor to join this boom market and promoted the development of REITs.At the end of 1999, the most important Act, REITs Modernization Act, passed and published in 2001. This Act reduced the distribution proportion to 90%, and stipulated the companies could dominate the profits freely after they pay the tax from their un-distributed incomes. T herefore, REITs could use this profit to maintain the existing properties, invested to new properties or pay the debt. As a result of that, this Act increased the investment chance and promoted the business performance. These Acts helped REITs to become more flexible, more focus in client demands and a more profit-seeking institution.The supporting laws and policies are definitely important, however, REITs needs more supporting from the financial system, and the evaluation system is considered to be the most important systems in REITs development.The evaluation system in the U.S. is quite complete. With the experience of over 100 years financial operation, the Americans accumulated substantial finance evaluation experience. When REITs started, the evaluation of the REITs products were not difficult tasks to finish. Almost all the REITs projects had been evaluated correctly, which provided accuracy information to the investors. Due to the REITs market is not difficult to enroll, most of the investors, including individuals and institutions, could operate readily when they joined the market. That absolutely promoted the REITs boom in the United State during 1990s.In addition, REITs companies in America invest to specific objects. Compared with China, the U.S. REITs concentrated in existing real estate projects, which means the companies prefer to operate the buildings rather than to establish one. That would absolutely reduce the risk for REITs, which attracted a lot of investors.These three factors motioned higher up supported the REITs developed very fast since 1990s and make it becomes one of the most efficient and mature REITs model in the world. The Chinese REITs may probably enlighten form these experiences and avoid the problems by learning their developing history.IV. CountermeasuresTo establish a relatively complete environment for REITs investment, China would probably benefits from the American experience. The paper will provide some suggestions wh ich mogul helpful for improve the REITs in China.A. Exemption of the double tax of REITsAs Chinese REITs markets were primarily affected by the investment environment, especially the supporting laws, the Chinese government could refer to the American model to release the law restricting gradually.The most exigent problem which should be solved first is the taxes on the REITs products. The American experience exposed that the transparency feature of the tax is the most important factor promoting REITs market boost. Without the tax transparency, the returns of the REITs would be very low. The Chinese government should use this experience for reference, exempting the double tax on the REITs, stimulating the REITs markets by raising the returns.B. Introduction for the publicDue to the returns of REITs are a little bit higher than the stock markets and the investment skill is fairly easy to grasp, both the individual and the institutional investors would be willing to invest to this mar ket. However, the REITs market was not flourishing as the exception, that is mainly because most individuals in China did not understanding what was REITs and how many retunes they could received by the REITs, even the specialists would not invest lightly due to the unclear information of supporting policies of the REITs. If the government really want to boom the REITs market, they should focus on publicize the REITs products to the citizen and publish the very clear supporting policies or law to recruit the investors faith. In order to extent to market of REITs, it should absorb both individual investors and institution investor to join. However, the Chinese government paid more attention on the institutions instead of considering the individuals, which cause the insufficient funds of the REITs markets. Obviously, the institution investors are quite cautious and would not invest their money to the uncertain finance products such as REITs, which would directly lead the depression of the REITs markets and also caused a vicious circle no investors, no money and no money, REITs market would not attract investors. To change this situation, money from individual investors is necessary because the asset from individuals is fairly huge in China. The government should use this kind of power, just like the U.S. model, to support the unstable REITs market at its very beginning. Using the bank sell model, which is just like the fund sell model in China, and minimizing the unit of REITs just like the American to create the chance for individuals to enroll.C. The clear investment aimThe investment object is another severe problem in Chinese REITs model, REITs companies in China used to prefer invest to the big projects. Because the limitation of the test spots, the opportunities are very competitive. Most of the companies used their best properties to join this market, these properties are so huge that could not be evaluated very clearly before they used them to invest. Therefore, due to the unclearly evaluation of these properties, the information for the investors are ambitious, which would definitely cause severe problem in them investment decision-making. Moreover, REITs in China is a relative new investment methods for both individual investors and institutional investors, with the unclear information, investors therefore would not have a willing to buy this kind of finance products, they might consider that REITs is a very risky products for them to invest. That is also a reason why investors enthusiasm for this investment tool is not very high as the expectation. However, the situation in America is complete change. At the very beginning, REITs was considered to be a quite popular invest method, the reason for its depression is the only the double tax. Thereby, when the government released the tax and published some supporting laws to regular REITs, its market grew suddenly. That is because almost all the properties, which are provided by t he REITs companies in America, were not very huge at the very beginning and were evaluated clearly before they came into the markets. Even some properties are relatively big, having been given exhaustive information for the investors. Therefore, investor could easily invest to these products with this information and would approximately guess the incomes they would return. Such experience should be used in Chinese REITs market, establishing the professional evaluation agencies to provide the ex officio evaluation reports to the investors, making sure the information they received is true and intact. That might greatly stimulate the investors confidence and give them a positive signal that the REITs is a fairly formal investment tools for them to choose.V. ConclusionsThe Chinese real estate market is booming these years, but it is by no means that all of the foreign finance methods suitable for China. When we want to use some advance experience to the Chinese market, we should cons ider it very clearly, not only learn the structure of concept of the new method, but also we may need to condition out the essential of it and in what situation we will use it. According to the REITs, we may understand that even its concept is fairly suitable for Chinese situation, the operation details is also quite difficult to follow. It might need several years to establish our own REITs market and to publicize it to the whole citizen. That is not the task which only to publish some REITs products, it is also a task to build a whole REITs system, including the supporting policies or laws, complete the evaluation system and extending the REITs spots. All of them need time to finish. Therefore, we could not run it so fast but to make sure every step is moderate and efficient. In this circumstance, we may probably find some new problems and new chance for us to develop our REITs, and also we might attend some new ideas or methods to make the REITs more efficient and more suitable for China.ReferencesBarker, K. (2003) Review of lodgement Supply Interim Report-Analysis (London HMSO).Chan, S. H., Erickson, J. Wang, K. (2002) Real Estate Investment Trusts Structure, Performance, and Investment Opportunities (Oxford Oxford University Press).Eichholtz, P.M.A., Does International Diversification Work break for Real Estate than for Stocks and Bonds?, Financial Analysis daybook, January-February, 1996, pp. 56-62.Friday, H.S., G.S. Sirmans, and C.M. Conover, Ownership Structure and the Value of the Firm The Case of REITs, Journal of Real Estate Research, 1999, vol. 17, no. 1/2.Harvard University (2003) The State of the Nations Housing 2002 (Massachusetts,