Study Of Real Estate Investment Trusts Law

Wu Xiaolin, deputy governor of the People's Bank of China, declared on April 25, 2006 at the International Symposium on Residential Housing Finance System that China intends to broaden its securities market and launch its domestic REITs.Five REITs have been listed in Hong Kong, among which GZI REIT (0405) is the first REIT ever listed in Hong Kong (in December 2005) that encompasses Chinese domestic properties (located in Guangzhou). And CRCT has listed in Singapore which also encompasses Chinese domestic properties ' in 2006. These two provide us with two kind of REITs constructions that listed overseas.In composing this article, consultation has been made with the law firm Paul Hastings, legal counsel, to GZI REIT Asset Management Limited (manager of GZI REIT), and the law firm King & Wood, legal counsel to HSBC (GZI's joint global coordinator). REIT systems of the US, Hong Kong, Singapore and Australia are compared with each other, and proposals have been made with respect to the creation of REIT-related legal system in China. As a capital-intensive industry, the real estate industry demands substantial amount of funds, operates over long periods of time and carries high risks. It is a pillar industry in China. As a financial product, REITs can reduce banks' exposure to risks, meet the public's need for investment tool, improve the liquidity of real estate that produce long-term yields, improve informational transparency of the real estate industry, and upgrade the financial system of China to respond to international competition.The successful listing of GZI REIT demonstrated that it is possible for Chinese developers and investors to list REITs in Hong Kong after solving issues in regulation, foreign exchange "control, law and taxation. Meanwhile, corporate restructuring is necessary to meet the standards for listing in Hong Kong.By learning from REIT-related legal arrangements of other jurisdictions and taking into consideration the realities in real estate development in China, reasonable rules can be made with respect to such issues as the categories of assets for investment, dividend distribution policies, debt/equity ratio, capital structure restrictions, and equity structure restrictions.After careful consideration of the REIT legal system to be established in China, the author is of the opinion that in establishing the REIT system in China, priority should be given to the contractual form of REITs and private placements may develop into corporate form. Analyses are made of current legal rules and tax regime, and a tension is spotted between the trust system and the practice of public placement of REITs in China. Lastly, discussion are made regarding the mechanism and techniques for risk avoidance in REIT practices. Insights are given to the economic and legal causes that give rise to risks associated with highly-leveraged debts in REITs in the US and solutions available under US law. Some techniques may be adopted in connection with the restructuring of REITs to meet relevant legal requirements.