China green lights asset-backed securities linked to rental property
October 24, 2017 Category China News Round-up, Weekly
A decision by the Shenzhen Stock Exchange last week enabling one rental apartment operator to issue asset-backed securities may reflect a turning point in the industry’s push for financial innovation, including the eventual establishment of real estate investment trusts (reits), according to experts. China Young Professional Apartments (CYPA), a Beijing-based condominium operator catering to urban professionals in first-tier cities, won approval to issue CNY270 million worth of securities backed by its rental flats.
China’s securities regulator over the past two years has approved a number of asset-backed securities (ABS), giving developers and asset-owners an alternative financing channel. However the asset approval granted to CYPA is the first to be backed by rental properties for public distribution. Mofang, a Shanghai-based rental apartment company backed by Warburg Pincus, in January issued asset-backed securities through a private placement.
“The issuance is a boost for China’s leasing market, which without reits has long operated in an asset-heavy model,” said Chen Baolin, an asset-backed securities analyst with Tianfeng Securities. “This also suggests the supportive attitude of the regulator, and will encourage more operators to prepare ABS issuance.” Jin Wei, Investment Banker with Huafu Securities, said the CYPA deal is largely symbolic. “The real big deals will be from developers, which have much bigger inventory.”
After years of surging residential prices, the yields on urban rental properties in major Chinese cities are relatively small compared to world peers. Yields on rentals in first-tier cities average less than 2%, according to Savills. As a result, many property investors in China look for asset appreciation instead of income through long term management, the South China Morning Post reports. The China Securities Regulatory Commission (CSRC) is drafting rules for China’s first reit that will be sold to retail investors.
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