A speculative frenzy has pushed half of China’s eleven infrastructure-focused real estate investment trusts (REITs) up more than 20% this year while the benchmark CSI 300 Index slumped more than 5%.
Investors piled into the infrastructure REITs after Beijing vowed to increase fixed-asset spending this year. The finance ministry said in December that 1.46 trillion yuan ($230 billion) of local government special-purpose bonds were issued as an advanced quota to help boost infrastructure investment.
Several REITs suspended trading on Tuesday, warning investors of risks amid surging prices of funds that are designed to return stable incomes. When a lockup period for pre-IPO investors such as pension funds ends on June 20, analysts say prices may fall as many big investors cash out.
“The limited number of China’s hand-picked REITs are now over-valued,” said Julia Zhu, a consultant and partner of Shanghai-based China Insights Consultancy (CIC). “There are sell-off risks as institutional investors switch to products with lower valuations.”
Some REIT prices have soared. The Yantian Port Warehousing Logistics fund managed by Hotland Innovation Asset Management has leapt 60% since its IPO last October and is up 34% in the last six weeks. Fullgoal Capital Water, which owns investments in sewage treatment projects in Shenzhen and Hefei, has doubled its IPO price within seven months, and is up 45% since the beginning of 2022.
The CSI Infrastructure & Engineering Index has surged 8% and the state-owned Zhejiang Construction Investment Group Co Ltd has more than doubled its price since February 5, when an official from China’s National Development and Reform Commission told the state-owned Xinhua news agency that China would “take early actions” this quarter to boost spending on infrastructure to stabilise economic growth.
The recent surge in REITs is “unusual” and “speculative,” said Wang Yuan, an investment advisor at Huatai Securities. “We would like to warn investors of the risks of speculation. It is advisable to purchase at low points and hold long positions rather than trade frequently when the prices are high.”
A REIT managed by CCB Principal Asset Management, which owns investments in the Zhongguancun industrial park in Beijing, said “The fund’s dividend payout ratio will be significantly reduced as the trading prices rises substantially.” It added that its REIT’s main objective is to obtain income from stable cash flows such as rental fees from the underlying infrastructure project.
State media have attributed the price surges to investors’ hedging needs amid a weak equity market. Several favourable policies, such as tax breaks and an over-the-counter trading scheme introduced last month, have drawn investor attention to REITs.
China’s REITs are backed by income-producing properties and trade like stocks. Unlike other countries, China’s REITs are backed by infrastructure projects instead of property.
So far, eleven REITs have been listed in China, owning infrastructure investments ranging from sewage treatment plants and toll expressways to warehousing and beyond. Another four await a green light from the regulators.
Policymakers have hailed them as innovative financial products that source private money to fund public works, providing a channel for investors to tap into the country’s infrastructure growth.
The country’s securities regulator has required that all REITs pay a minimum dividend of 4%, which is attractive to investors amid a sluggish stock market and a property sector mired in debt.
Stocks on the mainland have had a weak start to 2022 and even last month’s cut to a key interest rate failed to significantly boost sentiment. Weak consumer spending during the Lunar New Year break disappointed investors, and a host of worries ranging from US-China tensions, to US interest rate hikes, and the Russia-Ukraine conflict continue to loom over markets.
That’s left local investors chasing returns and some say that’s left them vulnerable.
“Some funds have abused these publicly-traded REITs – which are scarce and small-cap – and have tricked retail investors who are not familiar with their valuation logic,” said a blogger called ‘Earn a bicycle,’ who claims to be an experienced investment banker, on the Xueqiu.com investor community. “There is no valuation standard in a speculative market…and all the REIT managers can do is only to warn people of risks by issuing alerts or suspending the trading.”
- By Iris Hong