UBS-SDIC has approval from China's State Administration of Foreign Exchange to use its quota under the Qualified Domestic Institutional Investor (QDII) scheme, which channels Chinese money into overseas capital markets.
It would be China's first offshore property fund and target Asian countries -- and in particular Japan, the source said, speaking on condition of anonymity. UBS-SDIC declined to comment on the fund launch plan.
"Asian countries will be the world's future engine of economic growth," the source told Reuters.
"Post-quake Japan is attractive because the price is cheap and the dividend yield is high," the source said, adding that UBS-SDIC was also researching investment opportunities in Hong Kong. He said the fund aimed to raise hundreds of millions of dollars but declined to provide further details about the plan.
UBS-SDIC is a joint venture between Swiss bank UBS AG and China's State Development and Investment Corp.
REIT investment returns in Asia are usually in a 5-10 percent range, much higher than dividend yields of comparable government bonds.
In the past two years, the global REIT market had an annualised total return of 22.4 percent, with a 5-6 percent dividend, while the Chinese residential rental level was only 2-3 percent, the source said.
However, China has increased its scrutiny on domestic capital, including bank loans and trust funds, channelled to the real estate sector, alongside its curbs on Chinese developers to raise money at the mainland stock market.
Because of Beijing's various measures to contain housing inflation, cash-flushed state-owned and private Chinese companies have increasingly set their eyes on overseas property markets.
Hong Kong billionaire Li Ka-shing's Yuan-denominated property trust, Hui Xian REIT, has attracted strong demand from institutional investors for its up to 11.16 billion Yuan ($1.7 billion) initial public offering.
However, orders from the retail sector are falling far short of expectations, said International Financing Review, a Thomson Reuters publication.