* Central bank adds its backing to emerging asset class
* Interbank bond market opened to 'quasi-REITs' on
* Move allows investors to monetise rise in property values
By Ina Zhou
HONG KONG, Feb 20 (IFR) - China's central bank has
authorised the first sale of a "quasi" real estate investment
trust (REIT) in the vast interbank bond market, in a move that
greatly expands the investor base for the new asset class amid
rising commercial property values.
State-owned Anhui Xinhua Media last week
launched Industrial Wanxin Jiayue Real Estate Investment Trust
Fund ABS, a 553.5 million yuan ($81 million) quasi-REIT
structured like a securitisation, which may well be a precursor
to the eventual launch of a listed REIT market in China.
After a series of private placements and one stock exchange
listing, analysts have welcomed the introduction of the new
format to the $7 trillion interbank market, home to the bulk of
Chinese fixed income securities and regulated by the People's
Bank of China (PBoC).
"PBoC's approval of Anhui Xinhua's transaction was on a
case-by-case basis," said a Beijing-based ABS analyst. "It is
uncertain whether more quasi-REITS will follow in the interbank
bond market, but PBoC definitely wanted to add the new asset
class into the interbank bond market."
The internationally recognised REIT format, where the trust
has full ownership of the assets and sells equity units to the
public, does not exist in China, due to hurdles like a lack of a
clear legal framework, as well as double taxation.
While an equity listing is not yet possible, property owners
in recent years have begun exploring the use of securitisation
techniques to monetise their assets and access funding.
Around 16 similar quasi-REITs have raised funds in the stock
exchange market in the past two years through private
placements, including a twin issue from Anhui Xinhua Media in
December, illustrating the growing interest from both investors
and corporations – mainly property developers and commercial
The only public listing of a quasi-REIT was in Shenzhen in
June 2015, when Penghua Qianhai Vanke REIT sold
securities backed in part against a portfolio of office
buildings from China Vanke. Up to 50 percent of its
assets are fixed income securities rather than direct property
Underwriters said such quasi-REITs gave investors access to
gains from commercial property assets at a time when China's
commercial property market kept rising.
While regulators have placed tighter controls on financing
for residential property developers since late last year,
commercial developers are not as tightly controlled, according
to the analyst.
For issuers, quasi-REITs receive off-balance-sheet
treatment, while securities backed with rental incomes or
property management fees do not. The format also allows issuers
to raise more capital than a more conventional securitisation.
"Anhui Xinhua's issue targeted institutional investors
rather than the public, so, in that sense, we still saw it as a
quasi-REIT, although it resembles a standard overseas REIT in
many ways," said a securitisation lawyer.
Given the complexity of the transaction, Industrial Bank, the
sole lead underwriter, spent three months meeting potential
investors one on one.
To put it simply, Anhui Xinhua's transaction packaged eight
buildings, where its bookstores are tenants, alongside other
shops, into a real estate investment fund and then raised 553.5
million yuan through securitisation of all the fund units in it.
Establishing a real estate investment fund allows the
originator, Anhui Xinhua, to float equity in the fund in the
future when a real REIT market forms.
On closer inspection, the underlying assets of the
securitisation include not only equity, but also debt. Such a
design, underwriters said, was intended to help reduce tax
The proceeds of 553.5 million yuan from the securitisation
were used to buy 100 percent of the five investment companies
that own the eight buildings and to lend 368.5 million yuan to
Interest payments on the loan are tax-deductible in China,
while dividends are not.
The securities comprise two tranches - a 330 million yuan
senior A tranche, rated AAA, with a maturity of 18 years, and a
223.5 million yuan senior B tranche, rated AA+, with a maturity
of 18 years.
Tranche A priced at 4.8 percent and B at 5.4 percent, both
towards the wide end of indicative price ranges of 4–5 percent
and 4.5–5.5 percent, respectively.
At the end of every three years, holders of the A notes have
the option to redeem the securities, and the issuer has the
option to adjust the coupon.
At the same time, Wanxin Leasing, a sister company of Anhui
Xinhua Media with the rights to the rental income from the eight
buildings, has an option to buy back the B notes at par.
Embedding Wanxin Leasing into the transaction is primarily
intended to prevent the loss of control over state-owned assets
(the eight bookstores), according to a banker familiar with the
Payment to investors of both tranches ultimately depends on
rental income from the eight buildings and asset values of the
In China Chengxin's estimate, rental income from the eight
bookstore buildings can easily cover payments to investors of
While holders of the A tranche are first in line for
repayment at maturity, B tranche investors are paid after the
payment to A tranche investors, assuming there is no early
redemption or a public listing.
If the property value of the eight bookstores goes up
through the life of the securities, B tranche investors will get
more than the principal and interest payment, and vice versa if
the value drops.
(Reporting by Ina Zhou; Editing by Steve Garton and Vincent