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China to accelerate real estate investment trusts launch

(ATF) Shanghai stock exchange is to push on with its pilot of infrastructure-focused public real estate investment trusts (REITs) and speed up their launch this year – in a move that will help local governments finance infrastructure projects while allowing retail investors to tap into what may become a $3 trillion market.

Accelerating REITs’ launch is one of Shanghai stock exchange’s key tasks for this year, among others such as providing more financial instruments to promote carbon neutrality and scientific innovations, optimising the mechanism for bond market-making, and promoting the inter-connectivity between exchange and inter-bank markets, according to a statement by the bourse on its official WeChat channel.

Almost 15 years has been put into researching and experimenting with REITs, with China only previously allowing privately sold quasi-REITs in the real estate sector. 

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Under a new pilot programme launched last August, the country will now see its first publicly sold trusts, which are investment vehicles backed by income-producing properties and trade like stocks. 

The programme will open a channel that lets investors tap into the country’s property growth, while limiting their speculation and avoiding property bubbles. With retail investors financing highways, bridges and business parks, local governments could also alleviate their debt strain. 

According to requirements issued by China’s top economic planner, the National Development and Reform Commission, a REITs project must be profitable or have a positive net operating cashflow in the last three years. By principle, it should be able to pay an annual dividend of at least 4% in the next three years.

“REITs have been a source of passive income for investors. Developing of the REIT market in the China is positive as it gives investors more investment options and access to China’s real estate market,” Seow Zhi Qi, credit research analyst at Singapore-headquartered Oversea-Chinese Banking Corporation (OCBC Bank) told Asia Times Financial.

LISTING RULES

There are signs that the first few REIT products will hit the market soon. At the end of January, Shanghai and Shenzhen stock exchanges issued the operating and listing rules for public REITs. On March 1, Shenzhen stock exchange launched the REITs approval system, disclosure website, and distribution systems. Meanwhile, project companies and fund managers are ramping up their first REIT products.

China Securities Journal reported that the country is expecting to roll out REITs in the first half, while other local media said the first batch will involve five unidentified projects.

“China’s regulators have attached great attention to REITs risks and returns. They have asked that the first REITs products must provide yields that are above 4%. The first REITs products are expected to be ‘best of of the best’ assets with relatively low risks and stable incomes,” He Zhaoxuan, director of valuation and advisory services at Cushman & Wakefield, said.

REITs have become popular around the world among investors seeking access to the real estate sector. The publicly traded trusts typically offer people access to shopping malls and office towers, paying out the vast majority of their income to investors in yields in the range of 4% to 8%. 

DATA CENTRES

In China, the trial will focus on infrastructure projects like highways and utilities. The pilot will also include businesses focusing on logistics, sewage and waste-treatment, data centres and 5G.

Because of their high dividends and lower liquidity in the mid-to-long term, REITs may be particularly attractive to insurers, pension managers and wealth managers, Wang Yifeng, Everbright Securities’ chief analyst on banking, said.

While traditional real estate isn’t included in the pilot, Goldman Sachs said the programme paves the way for including property projects in the longer term and that the market could be worth as much as $3 trillion one day. 

Unlike other countries, China is introducing a framework that allows individual investors to buy shares in a mutual fund, which then invests in asset-backed securities that indirectly hold the infrastructure assets.

INCREASED COMPETITION

OCBC Bank expects the launch of public REITs in China to also increase the competition for REITs listing.

“Singapore Exchange, for instance, has been attractive to foreign REITs with an increase in REITs listing with purely foreign assets. Over the years, we have also seen own local REITs venture abroad to growth inorganically. REITs no doubt benefit from being listed on a large platform with an ecosystem containing other REITs. We think China’s interest in promoting its own REITs could possibly highlight Singapore Exchange’s strength on this front,” Seow said.

Meanwhile, ChinaVenture reported that Greenland Holdings, China’s largest state-owned property developer, has received approval from Singapore Exchange to list hotel-focused REITs and could get listed in May or June of this year. 

Previous reports said Greenland could package up 19 of its mainland hotels worth $4.5 billion into a Singapore-listed REIT.

As of December of last year, a total of 16 REITs listed in Singapore and Hong Kong held 112 mainland Chinese properties, according to a report by Cushman & Wakefield.

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Iris Hong

Iris Hong is a senior reporter for the China desk, and has special interests in fintech, e-commerce, AI, and electric vehicles. She began her career in 2006 and worked for Interfax News Agency and for PayPal before joining Asia Financial in July 2020. You can reach out to Iris on Twitter at @Iris23360981

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