This article continues to discuss Risk Management for China’s Real Estate Pooled Investment Funds. The first part of this article was published on Chinalawinsight on December 2011.
B. Inherent Risks of Real Estate Trust Products
Inherent risks are closely related to the characteristics of real estate trust products and thus ingrained in such products as follows:
a. Real estate pooled funds generate returns through specific assets
Real estate pooled funds generate and distribute returns by structuring the priority of beneficial interests: according to the financing agreement between trust companies and real estate developers, trust companies raise funds from the public for specific acquisition projects and guarantee investors’ beneficial interests as a priority payment. The parent companies or actual controllers (usually real estate developers) of the specific acquisition project transfer shares to the trust companies to gain secondary beneficial interests. Therefore, real estate developer’s interests are bound to the priority interests of investors and trust companies distribute returns to beneficiaries in a particular order.