MoH Plan To Reduce Housing Inventory: Buy Houses And Rent Them Out

The Ministry of Housing is working on a couple of ideas to reduce housing inventory. One is to let (debt strapped!) local governments buy commercially built housing and turn it into public housing. This is a nice bailout for developers, but where do cash strapped governments get the cash? In many parts of the country, rental yields are lower than bank deposit rates, let alone loan rates. The other idea is to convert the property into rentals and then sell them as REITs. The initial plan focuses on state-owned developers in the first-tier cities.

ECNS: Ministry plans platform to provide rental information
The ministry has proposed to establish rental information platforms across the country. Local governments have been asked to build such platforms to allow landlords and rent seekers to post information. China's commercial housing agents are notorious for posting false rent information on their websites to lure customers.

The ministry also reiterated the importance of Real Estate Investment Trusts (REITs). It asked local governments to launch REITs pilot programs and gradually expand them.

iFeng: 各地政府去库存出妙招 可回购商品房作公租房
Sources close to the Ministry of Housing said the Department of Housing and tend to practice first public rental of REITs. Beijing-Shanghai-Guangzhou-Shenzhen deep state-owned housing prices or City investment company, may become the main REITs pilot enterprises. Such a large number of enterprises to undertake the construction of affordable housing and housing policy, and operational tasks, their housing assets in the hands of the policy can be packaged as REITs assets; and the pilot state-owned enterprises also need both, real estate, financial and other resources.
Instead of selling homes, the property will covert into a REIT and become public rentals.

Beijing Centaline research director Dawei is not optimistic about the public rental REITs, "China Property rental income is too low, not suitable for REITs", he said.

Yuejin Yan also believes that public rental rental rate of return is not high, the most conservative estimate of about 5%; but in reality is not stable rental groups. In the current rental market, the desire for a large capital investment, but do not want a lot of money did not dare to enter.
Not only is rent already low, but bringing mothballed housing inventory on to the market as rentals will put pressure on rental rates that could rebound back on housing. Too much property is too much property, no matter how you slice it.

The commercial real estate REITs equally bleak. According to estimates GF Securities, the current domestic commercial real estate office in addition to slightly higher yields outside the 10-year Treasury yields, earnings were lower than other commercial property 10-year bond yields, not yet fully implemented REITs, which tax concessions deletions and the legal system is not perfect for two reasons.

The biggest obstacle is that the tax system. REITs most prevalent in the United States, REITs are exempt from corporate income tax, real estate assets, REITs are also tax-free investment assets. In Hong Kong, China, according to the Hong Kong Securities and Futures Ordinance 104, REITs exempt from Hong Kong profits tax.

But the domestic tax system for commercial property company detrimental, leading Chinese commercial property rental rate of return sufficient to support issuance REITs.
By the time the laws, taxes and regulations are put in place, the inventory problem may be largely resolved.

Another issue is that the government is looking to cash out on affordable housing, in order to build more affordable housing.

From December: Big cities to launch REIT pilot scheme for property securitization
China's Ministry of Housing and Urban-Rural Development has initially chosen Beijing, Shanghai, Guangzhou and Shenzhen to launch pilot projects for long-proposed real estate investment trusts (REITs), covering affordable housing for rentals, including public rental housing and affordable rental housing, our sister paper Want Daily reports.

...The difference from earlier market anticipation is that the ministry's pilot projects will cover affordable rental housing but exclude commercial property holdings. The purpose is to securitize affordable housing to stimulate the inventoried assets to provide follow-up funds for further construction that can effectively resolve the funding problems for affordable housing for rent.
Better to convert existing developer built properties into public housing rentals, that would reduce inventory.

More on China REITs from SCMP:
China lacks high-quality assets to support reits, say experts
Specialist investment vehicles that could answer the funding prayers of cash-strapped mainland property developers are years away from being viable, despite a flurry of policy initiatives to aid the sector in a bid to protect economic growth.

Industry experts say China lacks the high-quality commercial assets needed to make real estate investment trusts - mooted on the mainland for a decade - sufficiently attractive to investors, especially given high borrowing costs and complex property taxes.

China reits could top US$6 trillion
Market talk is swirling that Beijing will allow the launch of publicly traded reits as early as next year as part of its efforts to support the ailing property industry.

Some developers aren't waiting around for REITs: China Vanke to Form Commercial Property Venture With Carlyle
China Vanke Co. (2202), the nation’s biggest developer by sales, said it agreed to form a venture with the Carlyle Group LP (CG) that plans to buy nine of the company’s commercial properties.

Carlyle Asia Investment Advisors Ltd. will hold 80 percent of the “asset platform company,” with Vanke holding the balance, according to a Hong Kong stock exchange filing yesterday evening. Vanke said the two companies will also set up a commercial-property management company.

Vanke has said it’s seeking smaller equity stakes in property projects as the company moves to divest assets and focus on operations to bolster shareholder returns and market share while reducing reliance on equity financing.

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