China details multiple measures to spur REITs development

BEIJING -- China has rolled out a slew of measures to develop Real Estate Investment Trusts as part of efforts to revitalize existing assets and boost effective investment.

The country will expand the pilot scheme for REITs to cover the spheres of new energy, water conservation and new types of infrastructure facilities, according to sources at the China Securities Regulatory Commission.

China currently allows REITs listings of infrastructure projects such as highways, industrial parks, sewage treatment, storage and logistics, clean energy, and affordable rental housing.

Steadily expanding the scope of REITs will maintain the healthy development of the market, channel more incremental capital into the infrastructure sector, and provide more options for investors, according to a research report from CITIC Securities, a major Chinese brokerage firm.

Besides the expansion to new spheres, the CSRC also plans to increase placements of existing infrastructure REITs.

Since China's first batch of nine REITs went public in 2020, its REITs market has grown rapidly. By the end of October 2022, a total of 23 REITs had been approved for issuance and 20 listed on the Shanghai and Shenzhen bourses -- this within the space of just over two years.

The 20 REITs that have been listed have raised a total of 61.8 billion yuan ($8.68 billion), which is mainly used to address shortcomings in areas such as technological innovation, green development and people's wellbeing. These recovered funds have helped drive investment in new projects to over 330 billion yuan.

Infrastructure REITs allow companies to monetize their infrastructure assets and apply the sale proceeds to finance future projects or reduce debts, according to a report from Moody's Investors Service.

Experts believe the infrastructure REITs in China will be conducive to efficiently using the country's high-quality infrastructure assets, forestalling local government debt risks and boosting economic growth.

In the secondary market, the 20 listed REITs saw their total market value reach 70.6 billion yuan at the end of October, with an average increase of 22.93 percent compared to the public offering price.

For investors, the asset's operating record and ability to generate positive cash flow -- as well as its low relevance to major categories of financial assets such as stocks and bonds -- will reduce investment risks.

The current limited supply of REITs is also helping to attract investors keen to take advantage of what is a limited offering at this stage. The three newly listed REITs based on affordable rental properties, for example, were all more than 100 times oversubscribed among investors.

"The move to increase placements of existing REITs will inject vitality into the REITs market by improving the revenue generating capacity of existing assets, and enhancing the valuation of REITs with strong operating capability in the secondary market," said a bond research team of CITIC Securities.

In addition, the CSRC will encourage qualified privately-owned projects to list in the form of REITs, while also paving the way for private enterprises to participate in the pilot scheme.

These specific measures followed China's decision to engage in the REITs drive. China's outline of the 14th Five-Year Plan (2021-25) proposed explicitly to boost the healthy development of infrastructure REITs, to effectively utilize existing assets and foster sound circulation between existing assets and new investments.

According to a guideline released by the State Council in May this year, the healthy development of REITs will be promoted, while a multi-level infrastructure REITs market will be established.

REITs had already for some time been a popular asset class for investment in major economies like Singapore, Japan and the United States. Globally, the REITs market had been established in 43 countries or regions by June 2021, with the market value of over 900 REITs products totaling around $2.4 trillion, data showed.

Though China is a newbie on the REITs route, experts believe that with infrastructure spending being a key growth pillar for China, REITs in the world's second-largest economy has immense potential for investors.

Looking forward, the scale of REITs in China, backed by nearly 100 trillion yuan worth of infrastructure assets, is expected to top 1 trillion yuan, and its value may surpass that of other Asian REITs markets, said Zhang Yu, managing director of investment bank CICC.

"Global investors can access REITs in the Chinese market through the Qualified Foreign Institutional Investor programme, but we believe their access may be broadened as China continues to open its financial markets," a report from UBS Investment Bank noted.