Opportunities and challenges of real estate securitization

Securitization is the process whereby an originator structures and issues securities with illiquid assets that can generate steady cash flow as underlying assets. It is a type of structured financing backed by credit of the underlying assets. The term “real estate securitization” is used in this article to refer to a process where a property developer structures and issues asset-backed securities (ABSs) secured by all of its qualified assets.

Data from the Asset Management Association of China (AMAC) show that since the filing system was implemented in late 2014, the combined issue size of ABS programmes had been rising drastically to RMB1.61 trillion (US$251 billion) as of the end of 2017, growing by 133.56% on a year-on-year basis. Apart from robust growth, securitization products backed by real estate assets are increasingly diversifying to include quasi-real estate investment trusts (REITs), commercial mortgage-backed securities (CMBS), as well as ABSs with property management fee, long-term rental income from apartments, etc., as underlying assets.

The prevailing regulatory policies for the real estate industry and the regulatory environment for the financial industry are forcing real estate companies to take immediate action to adapt to the new market environment and policies. These involve shifting their focus from extensive expansion to lean management, and considering the use of securitization to achieve objectives that range from gaining access to external capital, improving debt structure, and reducing leverages to revitalizing existing assets and transforming their business models.

The tightening regulation over financing activities combined with increasingly steady control measures for the housing market in recent years is presenting a wealth of opportunities for asset securitization, as real estate companies find it more and more difficult to gain access to capital.

Jia Yong and Ma Huijun are partners at Zhong Lun Law Firm