REITs signal faster shift in realty biz

China's launch of a pilot program for commercial property real estate investment trusts (REITs) marks a substantive step toward building a new development model for the real estate sector, analysts said, as policymakers step up efforts to steer the industry away from debt-driven expansion and toward more sustainable, asset-light growth.

Commercial property REITs are closed-end publicly offered securities investment funds that hold commercial real estate to generate stable cash flows and distribute returns to fundholders.

On Dec 31, the China Securities Regulatory Commission released an announcement on rolling out a commercial property REIT pilot program, taking effect immediately, with the Shanghai and Shenzhen stock exchanges releasing supportive rules. Market participants can now submit applications for issuing commercial property REITs.

Sources familiar with the matter said the initial phase of the pilot will proceed prudently, prioritizing quality over speed, and maintaining strict standards for issuance, compliance and risk management.

Priority will be given to commercial complexes, retail properties, office buildings and hotels, while other property asset categories — such as long-term rental housing units — will not be excluded. Project reserves are considered relatively ample, with overall quality assessed as solid, the sources said.

Analysts said the pilot launch marks more than the introduction of a new asset class — its deeper significance lies in reshaping the real estate sector's business model, which has long relied on high debt, high leverage and rapid turnover.

By providing financing for the operation of income-generating commercial properties, the analysts said REITs will encourage property companies to shift away from asset-heavy real estate development toward asset-light, operations-focused business models.

Equally important, as equity-based instruments, REITs will enable developers to obtain funding without increasing debt, and thus lower their balance-sheet leverage, in addition to improving their liquidity condition and cash-flow stability by converting illiquid commercial properties into publicly traded financial products.

Zhang Zheng, a professor and vice-dean at Peking University's Guanghua School of Management, said the launch of commercial property REITs responds to longstanding market demand.

"Commercial property needs to shift from extensive expansion to efficient investment and refined operations, and from an asset-heavy model toward a more balanced mix of light and heavy assets," Zhang said. "That transition requires suitable financial instruments, and REITs are the most important."

The timing of the pilot also reflects deeper structural changes highlighted in a recent commentary in Qiushi Journal, a flagship magazine of the Communist Party of China Central Committee.

The commentary underscored that while China's real estate market is undergoing profound adjustments, the sector remains important to the national economy and a major source of household wealth.

It called for an overhaul of the real estate development model, encouraging developers to accelerate the shift away from a model centered on new home sales toward holding income-producing properties and the provision of quality, diversified services.

Taken together, the latest developments underscore China's firm resolve to advance a new development model for the real estate sector, stabilize and improve market expectations for the sector, and guide the industry toward more resilient and sustainable path, analysts said.

The launch of the pilot marks a new phase for China's REIT market as well, with commercial property and infrastructure REITs developing in parallel. As of Dec 27, a total of 78 infrastructure REITs had been listed in China, with a combined market capitalization of 219.9 billion yuan ($31.5 billion), official data showed.

Looking ahead, the CSRC said it will expand REIT-related indices, support fund managers in developing index-linked products, step up efforts to guide long-term institutional capital into the REIT market, and promote the inclusion of REITs in stock connect programs.

Supportive rules specify that proceeds raised through commercial property REIT issuances should not be used to purchase land for commercial residential housing. They also introduce more market-oriented return requirements linked to the yield on 10-year government bonds.