China's pilot scheme for real-estate investment trusts (REITs) has launched with the debut of nine infrastructure funds. Five of the funds started trading on the stock market in Shanghai and another four in Shenzhen.
It is a tentative launch, with all the funds backed by infrastructure projects rather than the privately owned commercial real estate you might expect. The properties include highways, industrial parks, warehouses and sewage plants. No gleaming office towers, thronging shopping malls or newly minted homes to be seen.
Still, the offerings have got off to a reasonable start. The C¥2 billion (US$313 million) offer to retail investors was heavily oversubscribed, with orders for C¥30 billion (US$4.7 billion) of stock, according to Reuters. The hope is that the REIT industry will progress to offering funds backed by private assets in the future, and will offer a way to securitize China's enormous pool of property assets.
Ever since I moved to Asia in early 2001, China has been blathering about getting REITs off the ground. There's been a lot of talk, and precious little action. Several times, China claimed to have launched REITs, only for it to become clear that, no, these are not REITs.
China first released rules for residential and commercial property trusts in 2002, but the first such funds weren't publicly listed, and were only offered to a small group of investors, capped at 200.
In 2015, China Vanke, one of China's largest residential developers, sold securities backed by a portfolio of its office buildings into the Penghua Qianhai Vanke REIT. But up to half of its assets are fixed-income securities rather than actual property. Other "quasi-REITs" were also offered that sounded like, but actually weren't, REITs.
This time around, the products are still not typical REITs as we know them. They all consist of public infrastructure projects, a new way to alleviate the huge debt burden that threatens to overwhelm many local governments. They are structured as mutual funds that invest into an asset-backed security that contains the actual project.
It has taken a year to get the specifics of these REITs off the ground. China's state-planning agency, the National Development and Reform Commission, announced the pilot program on April 30, 2020, in conjunction with the stock watchdog, the China Securities and Regulator Commission (CSRC). The two bodies firmed up those requirements with formal rules issued in August.
The scheme is as much a tool to encourage sustainable funding for state-backed projects as it is a tool for investors. The program is deliberately picked by Beijing to spearhead the country's pandemic recovery, APREA, the Asia Pacific Real Estate Association that represents property funds, notes.
The guidelines to last year's announcement stipulate that certain areas will be favored for REIT-backed development, in particularly the economic zones around Beijing, Shanghai and the Yangtze River, the Greater Bay Area project in Guangdong Province and Hong Kong, and the Hainan Island free-trade zone.
There aren't the usual tax benefits for investors that you find in Western-style REITs. There is, however, a restriction on leverage, capped at 20% of assets, which can be used for acquisitions or for maintenance and renovation of the infrastructure. As with REITs in Singapore and Hong Kong, 90% of distributable profits must be paid out to investors, after adjusting for fair value, depreciation and operating cash flow.
Although the nine REITs floated so far give investors access to old-fashioned, traditional types of infrastructure, there's scope for more-exciting holdings. A second category of "new infrastructure" includes Internet architecture, data centers, 5G telecom towers and "smart" transportation, smart energy and smart-city projects.
The new China listings brings the total number of infrastructure-backed securities around the Asia Pacific region to 28, with a market capitalization of US$79.5 billion.
The vast majority of that, US$63.0 billion, is in Australia. Singapore has barely 10% of that amount, US$6.9 billion, in second place, and China is now the third-largest infrastructure-fund market in Asia, at US$4.9 billion in market cap. Rounding out the total, there's a smattering of exposure in India (US$3.2 billion) and Japan (US$1.5 billion).
Both India and China have great potential. Given the size of China's infrastructure sector, which is enormous in a country that has historically been governed by engineers and enamored with building Big Things, it could surpass the United States as the world's largest securitized market for infrastructure, APREA says.
The listing of each 1% of China's infrastructure assets adds US$2 billion in exposure, according to Standard & Poor's. India, meanwhile, could see its infrastructure investment-trust market expand to US$100 billion over the course of the next five years, according to CRISIL Ratings.