China's first investment fund targeting the public rental housing market while retaining equity ownership will be launched in Shanghai's Hongkou district. It could be converted into a real estate investment trust to trade publicly when the regulatory environment allows, sources said.

The private equity closed-end fund will invest in developed public rental residential properties in the district, one of the city's prime residential communities and which has strong rental demand. The fund will jointly be established by Shanghai Hongkou Public Rental Housing Investment and Administration Co Ltd and three other parties.

Of these parties, Taiping Asset Management Co Ltd, a subsidiary of China Taiping Insurance Group Co Ltd, is the lead private investor in the fund. The two others are UBS Global Asset Management (China) Ltd and UBS SDIC Fund Management Co Ltd, which are the fund's investment manager and adviser respectively.

The establishment of the fund is an innovative trial between local government and international financial institutions, said Yan Yuejin, a researcher with E-house China R&D Institute. He calls the cooperation a perfect match.

Local governments are obliged to provide public rental housing to low-income families but their inexperience of monetizing these public rental units will undermine these assets' long-term operation.

Financial institutions on the other hand are eager to seek new investment opportunities amid the economic slowdown. They see public rental housing as having a growing importance in the process of new urbanization, said Yan.

Regina Yang, head of research and consultancy with Knight Frank, Shanghai, said the fund will play an active part in promoting public rental housing, adding that its success will encourage more institutional investors and local governments into this investment model.

"Low rental housing is a more effective and realistic way to solve the living problems of low-income families,"said Yang, who believes the country's existing affordable housing plan offers more coverage than the public rental program.

Yin Xingmin, a professor from the China Center for Economic Studies at Fudan University, said the cooperation will be a great opportunity for local governments to learn how to use market forces to activate and manage their assets.

But Yin also reminded people that during the process of the cooperation, the local government should take the initiative in keeping risks under control.

The real estate sector has been looking forward to the launch of real estate investment trusts in China for a long time. However, the central government is apparently being cautious about this financial instrument, said Yin.

According to him, this new closed-end fund will channel more money into the public rental housing market, providing affordable living space for low-income families. If it goes public as a real estate investment trust, it will offer individual investors a low-level entry into housing investment and possibly solid yields.