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May 4, 2017

With the United States’ Federal Reserve looking to further raise interest rates, Chinese developers and asset holders may face challenges when it comes to financing and re-financing, while the likely tightening of financing policies by Beijing will also make it tougher for businesses.

“In order to obtain necessary funding and reduce financing costs in this challenging environment, developers and asset holders must rely on a combination of traditional financing models (such as bank loans or corporate bonds) as well as other channels,” says Dave Chiou, Head of Capital Markets Research at JLL China.

A recent report from JLL confirms that asset securitisation in China is likely to become increasingly popular as investors actively seek more diversified financial channels.

“Although asset securitization is still in its infancy in China, it has vast potential and we expect it to become a major financing model for Chinese developers and asset holders. This model is likely to influence the overall development pattern of China’s real estate finance sector,” says Joe Zhou, Head of Research for JLL China.

The recent development has sparked discussion around the part of REITS in the market. Currently, only Japan, Hong Kong, and Singapore having established REIT markets with legal and procedural barriers so far preventing China from launching true REIT products.

“Over the short-to-mid-term, REITs are unlikely to develop in China, even if policy makers loosen regulations or provide tax preferences to investors,” observes Zhou. “Low rental yields are the biggest barrier; yields for many assets currently only sit at four percent or lower. A lack of professional management talent for REITs and property assets have also, so far, restricted the development of REITs in China.”

In spite of many difficulties, REITs are still regarded as a promising alternative approach to China’s real estate financing challenges. “Further relaxing of policy and evolving mindsets from investors, developers and asset owners could allow REITs to emerge as a major funding solution in China over the long term. REITs’ ability to offer stability, returns and diversification that no other asset class can mimic ensures that they will continue to receive consideration in the years ahead,” says Zhou.

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Dave Chiou

Head of Capital Markets Research, JLL China

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