The draft rules are set out in the "Guidance on public offering of infrastructure securities investment fund (trial)" 《公开募集基础设施证券投资基金指引（试行）》("Draft Guidance") published by the China Securities Regulatory Commission (CSRC) on 30 April 2020, and are open to public consultation until 30 May 2020.
This client alert provides a snapshot of the key features of the proposed regime for China REITs based on the Draft Guidance, with comparisons against the corresponding regimes in Hong Kong and Singapore.
What will be the structure of a China REIT?
Fund + ABS structure
China REITs comprise a domestic fund that invests in a single asset-backed securities (ABS) scheme, which in turn indirectly owns the underlying infrastructure assets:
What kind of assets can China REITs invest in?
China REITs shall primarily hold income-generating infrastructure projects that have been in operation for at least three years. Examples given in the Draft Guidance include warehouses, toll roads, airports, ports, public utility facilities and industrial parks. Residential and commercial real estate are specifically excluded from the permitted list of investments.
In line with the country's development blueprint, the first China REITs piloted will invest in certain preferred areas within China, including the Beijing-Tianjin-Hebei area, Yangtze River Economic Belt, Xiong’an New Area, Greater Bay Area, Hainan, and the Yangtze River Delta ("Preferred Locations").
How do China REITs compare to Hong Kong and Singapore REITs?
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Hong Kong REITs
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Singapore REITs
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China REITs
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Legal Structure
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Unit Trust.
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Unit Trust.
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Fund + ABS.
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Public Offering
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Yes.
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Yes.
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Yes.
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Minimum Offering Size
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Not prescribed, but driven by commercial considerations.
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At least S$300 million.
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At least RMB200 million.
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Underlying Assets
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At least 75% invested in income-generating real estate.
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At least 75% invested in income-generating real estate.
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At least 80% invested in infrastructure projects that generate recurrent and stable income with at least 3 years of operations.
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Geographical Restrictions
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None.
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None.
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Preferred Locations (see above).
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Asset Ownership
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Good marketable legal and beneficial title in all its real estate.
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Proper legal and good marketable title in all its real estate.
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Ownership or franchising rights of infrastructure projects.
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Retained Ownership by Originator / Sponsor
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No prescribed requirement but driven by commercial considerations.
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No prescribed requirement but driven by commercial considerations.
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At least 20% of the REIT for at least 5 years after listing.
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Distribution
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At least 90% of the audited annual net income after tax shall be distributed each year.
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At least 90% of the specified taxable income shall be distributed each year to qualify for tax transparency treatment.
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At least 90% of the audited annual distributable profits shall be distributed each year.
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Borrowing Limit
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45% of gross asset value.
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50% of the deposited property.2
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20% of gross asset value of the fund.3
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Key Management Requirements
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At least 2 responsible officers (3 in practice) each of whom shall have at least 5 years’ track record in investment management and/or property portfolio management.
Type 9 license (asset management) issued by the Securities and Futures Commission of Hong Kong.
Other customary corporate governance requirements (e.g. INEDs).
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10 years of relevant experience for the CEO and the directors, including 5 years at a management level.
At least 3 full-time representatives resident in Singapore, each of whom has at least 5 years of relevant experience.
Capital markets services licence for REIT management issued by the Monetary Authority of Singapore.
Other customary corporate governance requirements (e.g. INEDs).
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At least 3 responsible officers, 2 of which have at least 5 years of experience in infrastructure operations, with the remaining officer having at least 5 years of experience in infrastructure operations or investment management.
Other requirements under the Securities Investment Fund Law (证券投资基金法) and Administrative Measures for the Operation of Public Offering Securities Investment Funds (公开募集证券投资基金运作管理办法).
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Governing Law
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Hong Kong.
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Singapore.
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China.
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Talk to us!
Submissions for the CSRC public consultation on the Draft Guidance are due by 30 May 2020.
If you would like to collaborate on a submission regarding the Draft Guidance, or have any questions on the above matters, please liaise with your usual contact at Baker McKenzie or the lawyers listed in this client alert.
1 While the PE fund and its manager are not specifically prescribed under the Draft Guidance, they may be required for practical reasons.
2 On or after 1 January 2022, 45% of the deposited property. The aggregate leverage may exceed 45% of the deposited property (up to a maximum of 50%) if the REIT has a minimum adjusted interest coverage ratio of 2.5 times after taking into account the interest payment obligations arising from the new borrowings.
3 The purpose of the loan facility shall be limited to the maintenance and renovation of infrastructure projects.
