Why China’s REITs are breaking the mold
The much-anticipated C-REITs are aimed at boosting growth while avoiding overheating
Nearly two decades in the making, China this summer launched its first batch of real estate investment trusts, forging a unique financial structure aimed at bolstering the country’s economic development.
Nine REITs were floated on the Shanghai and Shenzhen stock exchanges in June, raising a total of RMB30 billion (US$4.7 billion). The new REITs are all backed by real assets, including infrastructure projects and certain types of real estate, including logistics and business parks.
But while REITs are familiar to investors the world over, observers expecting a structure that mimics the equity REITs in markets such as Singapore, the U.S. and Japan will be disappointed.
Like their counterparts elsewhere, China REITs are publicly-listed trusts backed by real assets. They are tax-transparent and pay out the majority of their profits in dividends.
However, China’s new infrastructure REITs are structured like public funds that invest in asset-backed securities, which indirectly own the underlying assets.
“This is a unique structure designed to suit China’s needs,” says Eric Pang, Head of Capital Markets, China, at JLL.
The rationale for the structure is twofold, he says. Firstly, to provide liquid, income-producing real asset investments to the market. Secondly, it directs investment capital towards infrastructure projects that will enhance China’s economic development, lowering the cost of capital and allow governments to fund these projects off their balance sheets.
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The Chinese government is also very clear about what it does not want REITs to do.
“The authorities do not want to fan the flames of an already hot real estate market, such as for-sale residential,” says Pang.
So REITs are currently limited to infrastructure and certain types of real estate, at present logistics and business parks. There are also geographical limitations.
These restrictions mean that capital will be funnelled to where the Chinese government believes it is needed, without ramping up the price of homes or other in-demand real estate sectors.
However, the range of real estate sectors which are ‘REITable’ is set to expand, which will open up new opportunities for real estate investors. A recent circular from China’s National Development and Reform Commission confirmed that affordable rental housing will be promoted as a sector suitable for REITs, which will spark further IPOs.
“We expect to see a number of new REIT launches in the future,” says George Xiong, Executive Director of Valuations, China, at JLL. “The provision of rental housing is a key target for the Chinese government but so far we have not seen too much institutional investment in this sector.”
In the longer term, REITs will bring a change in mindset to the Chinese real estate market as well as providing a new investment avenue and capital, says Pang. “We have had a 30-year development model, where the system is driven by the provision of land and planning permission. REITs will enable China’s real estate sector to take a long-term asset management view.”
As REITs can be a medium risk and stable return model, logistics developers and asset managers are expected to show increased interest, says Xiong, pointing to GLP, one of the first REIT sponsors. REIT sponsors must retain a 20 percent stake for at least 5 years to maintain alignment of interest with investors.
On the investor side, projected dividend yields on the REITs range from 4% to 12%, according to their prospectuses. And so far, the first REITs have traded steadily, with most shares taken up by sponsors and domestic institutions, with less than 20% of units bought by individual investors, says Xiong.
“While they offer liquidity, most investors are expected to hold their units for longer,” he says.
The big question for many is whether China will develop an equity REIT regime in line with the international model.
“I foresee this to be a long journey,” says Pang. “This structure and current batch of REITs have been cooking for a long time and we are still in the early stages. China is a unique market; policymakers do not want to introduce measures which may lead to overheating.”
Kontakt Eric PangHead of Capital Markets, China
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