Chinese infrastructure REITs are expected to arrive soon, ahead of long-anticipated commercial property REITs. But logistics property will fall under infrastructure
Logistics assets are tipped to be included in the new infrastructure real estate investment trusts (REITs) launched in China, possibly in the coming months. According to industry sources, Chinese groups such as Shanghai Lingang Economic Development Group – described as the third-largest industrial park developer in China – have begun discussions on listing some of their assets.
Shanghai Zhangjiang Hi-Tech Park Development Co, whose signature project is a technology park of the same name in Pudong, Shanghai, is thought to be planning to list its own trust.
In a bid not be seen favouring offshore investors, the Chinese government will prevent companies funded mostly by overseas capital from taking part in the first round of REIT launches – but they might be included in subsequent ones.
“The government would not like to see these groups monetising their assets and making a profit from their investments,” says a person familiar with the Chinese market. “The government looks at things a bit differently from the rest of us.”
But such sentiment has not dampened optimism among foreign investors. “We are trying to be involved,” says a manager of foreign capital in China. “It is fair to say that we are not ready to list, nor can we. But we are looking at how we can work with Chinese logistics groups which can list.”
Another overseas-based group developing logistics in China is looking at the REIT concept “in detail”, and is planning to start “preparatory work” to position itself for when listing is possible. “It is early days yet, as the guidelines were only released a couple of weeks ago,” says one source.
In April, after more than a decade in discussion, two Chinese authorities – the National Development Reform Commission (NDRC) and the China Securities Regulation Commission (CSCR) – jointly issued draft guidelines for the creation of pilot infrastructure REITs.
Under the definition of “nature of business”, the NDRC and CSRC include logistics, warehouses, IDCs, high-tech industrial parks, and industrial parks alongside traditional infrastructure, such as toll roads, hydropower and gas heating, sewerage treatment and other public utilities.
Requirements include income-producing assets with growth potential, strong and creditworthy sponsors, and experienced operators. Funds raised for an IPO must be invested in new infrastructure and public utilities.
A Shanghai-based UBS banking research team estimates that the collective value of assets available to the proposed REITs in the form of toll roads and railways at RMB17trn (€2.21trn), of which about RMB11trn is in interest-bearing debt.
“This creates big potential for infrastructure REITs,” Robin Xu, UBS investment bank analyst, wrote in a note to clients, saying that Chinese construction companies will benefit most.
In April, China’s State Council authorised issuance of a further one trillion yuan in local government special-purpose bonds for infrastructure projects.
“Not only would this additional infrastructure funding help solve construction companies’ leverage problems, it would help stimulate more infrastructure projects to boost construction revenue and profit,” Xu wrote. “This should help provide additional funding for infrastructure projects by encouraging more personal savings to be invested in infrastructure REITs.”
Industry sources say the Chinese government is keen to provide state-owned companies with high-quality, cash-yielding assets.
The joint NDRC/CSRC circular identifies locations from which assets can be included in pilot vehicles, including Jing-Jin-Ji (the Beijing-Tianjin-Hebei megapolis), the Yangtze River Area, the Greater Bay Area of southern China, Hainan, and local economic and development zones.
Alvin Loo, head of China with Singapore-based ARA Asset Management, says: “This is a quite critical milestone for China REITs. But because the State Taxation Administration is not involved in the new pilot scheme, there is still a double-tax issue unsolved.”
He adds: “Because tightening of controls over the residential and commercial real estate sector is still ongoing, only infrastructure projects qualify as underlying assets for the pilot scheme under the new circular. Industry participants are excited by the new China REITs’ regulatory framework, having been lobbying for it for some time.”
Loo says industry participants and academic scholars are working closely with regulators to provide feedback for the new rules.
Zhang Zheng, a finance professor with Peking University’s Guanghua School of Management, says that other infrastructure REITs will be launched “within half a year” if the pilot is successful.
Zhang, an advocate for the creation of a C-REIT market, says: “REITs use market-oriented means to implement supply-side reforms and to promote economic transformation. They have the effect of revitalising the capital market.”
He adds: “Enterprises and local governments can use REITs to convert their illiquid real estate holdings into liquid financial assets. The freed-up capital will go towards reducing leverage. Compared with the traditional credit system, REITs are simple, direct and efficient financing methods that can reduce direct financing and diversify risks in the financial system.”
Zhang says that, although the Chinese asset management market started late in China, it has developed rapidly, and urgently needs more financial products, especially related to real estate.
“In my opinion, building a public REITs market in China will solve some of the country’s structural problems, unlocking real estate value and giving an investment channel for wealthy Chinese households,” he says.
The pilot REITs will be listed on Chinese stock exchanges, with institutional and retail investors able to buy securities. Some experienced industry players in China say that it will take time for the state-owned enterprises which own these assets to work out a process for launching a public vehicle.
“They lack the sophistication needed to organise a listed vehicle,” one source observes.
By comparison, the many high-tech industrial parks dotted across Shanghai are public and private partnerships.
Loo believes the first infrastructure REIT vehicles will be in the logistics sector, and that they will likely own a single asset, such as an industrial park, a business or a high-tech park, or a portfolio of logistics assets, probably located in or around Shanghai. “The rationale is the investors’ receptivity to the many suitable assets there,” he says.
Initial vehicles are expected to be modest in size. One analyst says the Chinese government encourages development of logistics facilities that support its overall economic development strategy.
“There is a lot of liquidity in China today.
The government… is printing money. Interest rates have fallen, with another 20bps cut expected this quarter,” says a property executive. “But the government wants to steer that money away from commercial and residential real estate because it wants to prevent these sectors from getting too hot.”
The market hopes that infrastructure REITs will be the forerunners of C-REITs. “We are hopeful that commercial real estate will be allowed to follow after successful infrastructure REITs,” says Loo.
Others believe the listing of commercial assets in REITs is at least two to three years away. By then, multifamily will have priority, leaving commercial real estate, including office and retail to be introduced afterwards.