The real estate securitization market is growing rapidly in China. Aimed at providing debt-ridden local administrations and state-run enterprises with liquidity, China has launched a public real estate investment trusts (REITs) market to direct investment capital towards high-quality infrastructure projects in key areas.
China’s REIT move has provided a channel for local governments to recycle early investments, creating an equity-like form of funding for projects, according to Fitch Ratings.
Regulators cautiously plan out REIT route
Marking the start of a new era for China’s infrastructure, the so-called C-REITs are aimed at encouraging personal savings and private capital participation in the sector, thus, converting savings into investment capital in the long term. Before this, China had only allowed privately sold quasi-REITs in the sector, mainly for institutional investors.
China’s REITs are structured like public funds and backed by real assets. Unlike other countries, China’s framework allows real-time REITs, where underlying assets are backed by infrastructure projects rather than commercial properties.
To spur infrastructure development, China finally kicked off its long-awaited public REITs market in May last year. The country’s top securities regulators – China Securities Regulatory Commission (CSRC) and National Development and Reform Commission (NDRC) – approved the registration for nine infrastructure-underlying REITs. These much-anticipated C-REITs were earlier launched in June 2021 on the Shanghai and Shenzen bourses, aiming to raise $4.9 bn. These nine REITs were linked to underlying infrastructure projects like highway projects, industrial park projects, warehouse, and logistics as well as green projects.
A recent circular in August by the NDRC indicated that the Chinese government will give priority to “national key strategic” infrastructure projects for REIT trials, as well as “encourage the undertaking of trials for new forms of infrastructure.” “New Infrastructure” projects included data centers, artificial intelligence centers, 5G projects, telecommunications towers, Internet of Things (IoT), Industrial IoT, broadband internet, smart transit, smart energy, and smart city projects.
As per the report, key areas to be covered by the infrastructure REIT trials include warehouse logistics, railway lines, airports, ports, urban sanitation and recycling, solid waste processing, and municipal utilities. However, projects including hotels, commercial sites, high-rise offices, apartments, and residential buildings, will be excluded from the REIT trials.
According to Gao Li, spokeswoman of the CSRC, China plans to expand the coverage of infrastructure REITs program at the right time and at a steady pace. She added that CSRC will further encourage institutional investors like banks, insurers, social insurance funds, and securities funds to take part in REITs investment, improve rules and supervision, and ensure the healthy development of the REITs sector.
Beijing has been considering REITs since 2008. Although, concerns regarding China’s debt-fuelled property market boom over the past decade have kept this pilot program from initiating. Now, the financial regulators hope to expand the infrastructure REIT market to be worth $766 bn within a decade. As per APREA, the Asia Pacific Real Estate Association, the REITs program was deliberately picked by Beijing to spearhead China’s recovery from the Covid-19 pandemic.
Rich potential for investors
According to most analysts, REITs, which trade like stocks but offer stable cash dividends like bonds, will provide investors access to China’s $11.7 tn* stock market via infrastructure investments and help them diversify their portfolios.
China is a newbie in the REIT route, but REITs have already been a popular asset class for investment in major economies like Singapore, Japan, and the US. With infrastructure spending being a key growth pillar for China, experts believe that C-REITs backed by new economy assets in the world’s second-largest economy has immense potential for investors.
The scale of the China REITs market could be worth an estimated $3 tn, as per Goldman Sachs Group estimates, and surpass the United States ($1.2 tn market capitalization) as the world’s largest. According to Standard & Poor’s, China’s infrastructure REITs have the potential to become a $300 to $735 bn worth market over the next 10 years, driven by “new infrastructure” and e-Commerce assets.
George Xiong, Executive Director of Valuations, China, at JLL said, that the company expects to see a number of new REIT launches in China in the future. “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. While they offer liquidity, most investors are expected to hold their units for longer,” Xiong said in an August report.
Kanyi Lui, Finance expert and Partner at Pinsent Masons said that, the belt and road initiative offers a potentially huge pipeline of candidates for future infrastructure REITs. “Planned linkages with Hong Kong may allow overseas investor participation.”
Pearly Yap, Portfolio Manager, Equity Income at Eastspring Investments said, “REITs will also help to bring greater breadth and depth to China’s capital markets, as we expect the scope to extend beyond infrastructure assets in the future,” she added. According to the fund manager, China’s newest asset class offers an exciting opportunity for investors. Although, yields and the underlying assets’ quality will be key factors for investors when it comes to choosing and investing in REITs.
*by market capitalisation of all shares listed