Guarding against real estate trust investment risks

Where returns on bank wealth management products have dropped significantly, ordinary investors have started to place their confidence in investing in real estate trust investment products. The basis of this confidence is that effective measures are taken by the trustee (trust company) to strictly control the risks associated with trust products, and that such risks are disclosed to investors.

Preliminary due diligence

The main risks of real estate trust investments derive from the real estate projects themselves. Below are the two main areas where due diligence must be carried out at the outset to control risks. Due diligence of the party with the financing needs, i.e. the project developer, covers its basic particulars, business position, financial position, etc. Particular attention needs to be paid to: the particulars of the company’s shareholders, especially the actual controller; whether the capital contributions have been paid in by the shareholders of the party with the financing needs; any material restructurings of the party with the financing needs; and the business track record and credit standing of the party with financing needs in other investment projects.

Due diligence of the lawfulness and compliance of the project covers the securing and construction of the project. Particular attention needs to be paid to: the four certificates – the state-owned land use right certificate, construction land planning permit, the construction project planning permit, and construction project construction permit – and whether the environmental impact report has been secured; whether a major violation of laws or regulations has occurred; whether the project capital percentage satisfies the specified requirements, and whether the construction funds are being used for their intended purpose and there are oversight measures in place; and whether any rights restrictions exist, such as mortgages, pledges, and a placement under seal.

The development of, and returns from, real estate markets in different regions are extremely unbalanced, and an investigation of the market where the project is located should be carried out at the outset.