By Esther Fung 
 

SHANGHAI--A district government in Shanghai, UBS and an insurance company are starting a public-housing investment fund that could see public-private financing help China build more low-cost homes.

The fund will invest in completed, rental residential properties for low-income families in the Hongkou district of Shanghai.

It will later become a real-estate investment trust listed on an exchange in China, UBS said in a statement on Thursday without disclosing the size of the fund. China currently has no REITs.

"The establishment of this new asset class in China is significant as the model lends itself to being rolled out elsewhere in the country to support the...government's public rental housing plan," UBS Global Asset Management Asia Pacific head Kai Sotorp said in the statement.

Investors will get a stable dividend and potential asset appreciation, according to UBS.

The fund will "unlock the value of its fixed assets in the capital markets but, at the same time, ensure that the invested properties continue to be available for public rental," an unnamed senior official in Shanghai's Hongkou district said in the statement.

Shanghai Hongkou Public Rental Housing Investment and Administration Co. and Taiping Asset Management, a unit of China Taiping Insurance Group Co.(0966.HK), are investors. It will be managed by UBS Global Asset Management (China) Ltd., UBS said in the joint statement with Hongkou district. Taiping Asset Management could not be reached for comment.

Beijing wants local governments to speed up construction of public housing and find innovative funding but this is hard because property developers and investors shun these projects because they don't generate big returns.

China has increased spending on affordable housing--a central plank of its drive for social stability. But paying for it, shoddy construction and misuse of funds is a problem.

To attract private investment authorities require construction of affordable housing as a prerequisite for buying state land.

Insurance funds can invest in public housing but their access to more lucrative, higher-end private developments is restricted.

Investing in low-cost projects--especially in smaller cities--is a way to gain official favor for land purchases, some developers say.

Central and local governments allocated 413 billion yuan ($67.5 billion) for low-cost housing last year while an additional 467 billion yuan was raised from banks, corporate bonds and other instruments, according to a recent report by the National Audit Office.

Write to Esther Fung at esther.fung@wsj.com

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