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Real estate investment trusts are expected to become popular as an effective financing channel for domestic property developers in the next two to three years, business insiders said.
Originating in the United States in the 1960s, REITs are used to raise money for property development and provide mortgage to developers.
"The REITs have been newly introduced to China. But within two to three years, its amount will rise," said Stanley Chan, managing director of Stanley & Partners Investment Management Co Ltd.
Currently, there are more than 300 REITs in the United States with total assets of US$300 billion. By contrast, Shanghai has only received REITs of about US$300 million out of the total US$10 billion overseas investment in the property market.
Chan said the figure is expected to surge to US$2 billion in the next two to three years because of the lasting investment fever.
Singapore-based CapitaLand Group, for instance, will invest in China's property projects in three years. The company expects an annual 20 percent return in the booming real estate market in China. Its investment in a single project will be between US$10 million and US$150 million.
Some local investment and trust companies have already noticed the market potential of the financing product. Shanghai International Trust and Investment Corporation will launch a trust product this month to support the development of Yongtai Garden in Pudong. The product is valued at 100 million yuan (US$12 million), with a maturity of 22 months. The annual return is estimated at 4.2 percent.
As part of the government's plans for budget homes, Yongtai Garden has already received financial aid from the Shanghai Aijian Trust and Investment Co Ltd last month.
"The government-backed project carries little risk," said Ling Bing, vice general manager of Shanghai International Trust and Investment Corp. "And for the developers, we offer sufficient capital support."
Chan of S&P Investment noted that the REITs will become a popular financing channel among the developers, who have been hit by banks' restriction on loans following an announcement by the People's Bank of China, the central bank, in June to limit lending.
The circular tightened requirements on property lending, prohibiting banks from granting loans to developers to use as their "current capital" or daily cash flow.
The loan restriction means a serious capital shortage for smaller and financially weaker developers. More property developers would likely turn to trust firms and the stock market for fresh capital.
At present, at least 70 percent of the funds in China's booming property market are provided by banks, which include loans to property developers and individual house buyers.
(Shanghai Daily January 5, 2004)
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