The proposal makes sense on paper. Every serious international capital pool has shifted property risk from banks to its stock market. Cash-strapped developers may jump at the chance to diversify funding, even if that means selling properties into a Reit at a discount. And investors are easily bewitched by the chance of owning a piece of a gleaming tower or shopping mall.
But any vehicle depending on leverage to juice up returns is a classic bull-market toy. UK Reits, among the worst hit, are now priced for a 50 per cent correction in property values peak to trough – twice as severe as the 1990s' slump. They may not pick up soon, as the deterioration in net operating income – rising vacancies, falling rents, bigger incentives – tends to lag the economic cycle. Property sales, a big driver of returns, are flagging: on Tuesday China's Vanke, the biggest listed developer, said sales were down about 9 per cent in value last year, with particularly steep falls in December.
In drawing up its regime, China needs to be prudent. Gearing should emulate most Asian Reits, with a sensible 45 per cent cap, rather than the limitless US. Ideally, the average term of debt facilities should be closer to the UK (roughly 10 years) than Japan (three). And shareholder registers should be anchored by big institutions, as in America, rather than hot hedge fund money. Singapore's Reits have swung from an 80 per cent premium to net asset value to an 80 per cent discount, even though underlying earnings have barely moved. Hardly the kind of instrument to force on widows and orphans.