China: Risk Management for China's Real Estate Pooled Investment Funds (Part I of II)

Last Updated: 18 January 2012
Article by You Yang and Lin Kaiyi King

A real estate pooled investment fund ("RE Pooled Fund") is where trust companies raise funds from investors (who act as both "settlors" and "beneficiaries" in the trust) and work with real estate developers to provide beneficiaries with profits in return. RE Pooled Funds generate returns through specific assets, equity investments, loans, or a hybrid thereof.

With housing purchase restrictions being implemented in China's major cities, real estate developers working with trust companies are facing serious cash flow pressure and some of them have even experienced operating difficulties. When real estate developers are unable to provide trust companies with high investment returns on schedule, and investors continue to hold expectations of high returns regardless of investment risk, trust companies are inclined to pay investors at their own expense and solve investment return problems with real estate developers internally rather than disclose investment risk to the investors. This is partly because trust companies value their reputation and the reputation of their investment products and want to avoid upsetting trustees and commercial banks who engage in selling the trust company's products. Trust companies may also be concerned about the potential for class-action lawsuits by investors. However, such trust companies may one day be unable or unwilling to pay investors out of their own pockets, or investors may no longer be satisfied with being paid investment returns, leading to a very unsustainable situation.

I. Risk Control for Real Estate Trust Products

A. Common Risk for Real Estate Trust Products

a. Policy risk

Real estate trust products have to manage real estate and finance policy changes as such products are closely bound to the real estate industry. For real estate, the central government has tightened control of real estate financing, housing purchase and loan restrictions as well as increased the rate of low-income housing construction. All these policies will indirectly aggravate cash flow problems and increase compliance risks. In the financial industry, the China Banking and Regulatory Commission ("CBRC") has shown a willingness to exercise tight control and close supervision of balances of the top 20 trust companies. Until recently, CITIC Trust, Ping An Trust, ZRT Trust and 20 other trust companies have called off real estate trusts. A People's Bank of China news release reported that the Industrial and Commercial Bank of China and the China Construction Bank have issued circulars to suspend real estate trust business while the Agricultural Bank of China and the Bank of China have halted real estate trusts in practice.

Therefore, policy-oriented effects are a strong distinguishing factor for real estate trusts as any policy changes will affect creation, implementation and termination of real estate trusts.

b. Implementation risks

i. Risks for real estate project

In real estate development and construction, there are potential risks caused by policy changes or circumstance changes in the whole process of land use right acquisition, project examination and approval, construction, acceptance of a completed project, sales and so on. Possible loopholes are listed below: (1) Developers cannot get relevant licenses as planned; (2) Construction is delayed for geological reasons leading to high project cost; (3) Final acceptance delayed for construction contract disputes or construction quality problems; and (4) Sales unsatisfactory due to inaccurate project positioning.

Admittedly, real estate development is a comprehensive industry, and can be both a commercial activity and a practical science. It is difficult to anticipate when and where potential risks will appear, thus trustees and trust companies had better know in-depth understanding about the real estate industry and the specific project.

ii. Liquidity risk

Assets held by China's real estate developer are mainly land, real estate and other long-term investments. Such asset structures could easily result in cash flow issues and liquidity risks, which may lead to fundamental breaches due to delayed payment of investment returns.

There are two options left for trust companies, they could continue funding the project (at their own expenses or setting up new trust product), or quit the trust project (disposing property and withdrawing capital). Either option will lead to risks and challenges.

iii. Increasing cost or diverting funds

Increasing cost and diverting funds are common ways to breach the contract as project profits are the main source for investment returns. Trust companies are seeking control risk by ways of setting up supervision accounts, transferring funds according to project schedules, assigning superior executives and accountants, controlling official seals, and so on.

However, trust companies are not professional real estate institutions, and employees are unlikely to have sufficient real estate knowledge and sensitivity. Therefore, it is difficult for trust companies to identify fictional cash flows or false contracts for the sake of increasing costs and diverting funds. Even worse, capital supervision may get out of control due to the neglect of administrators' duties and inadequate supervision procedures.

c. Unusual trust plan termination

Trust plans terminate in an unusual way due to the early termination clause stipulated in a trust contract. Trust companies will announce the termination, withdraw capital and distribute to beneficiaries. Potential risks are hidden in this process:

i. Related provisions are not specifically stipulated in the contract

Trust contracts and trust product introductions may not specify or enforce over key provisions. Trust companies have to specify provisions with respect to actual situations and negotiate with real estate developers, ensuring that the trust contract is enforceable and dispute resolution is the ultimate legal remedy.

ii. Legitimacy review

Upon undergoing dispute resolution, legitimacy review for trust plan is the foremost procedure (though many parties, judges and arbitrators are unaware of this). If the trust plan is declared to be invalid, the trust companies not only cannot get profits from the trust plan, but also should bear contracting negligence responsibility.

iii. Evidence

Upon undergoing dispute resolution, trust companies and real estate developers will inevitably commit to a burden of proof in order to distinguish responsibilities. If the trust companies fail to present contracts, financial vouchers, correspondence and related documents, it will lead to a disadvantage position or cause allegations of negligence of duty against the trust companies.

iv. Loopholes in legal system

China's laws and regulations are in the process of continuous improvement and there are disputes in practice that trust companies are confused with in dealing with trust property. For example, enforcement notarization for payment agreement/guarantee agreement is stipulated in most trust plans to avoid litigation and arbitration. However, there is no specific provision for enforcement of notarizations in China's legal system, so courts may dismiss enforcement in judicial practice.

v. Long dispute resolution period

Many factors affect dispute resolution efficiency: hard or easy cases, the parties' influence, the dispute resolution institution's efficiency, attention by the authorities, market factors and so on. A relatively long dispute resolution period may result in deflated assets or impossible investment returns due to changing market or policy risks.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions