Author: Sun Guiping, Shanghai Securities Fund Evaluation and Research Center
Synopsis:
- As a convenient investment tool for ordinary investors in mainland China to invest in commercial real estate, consumer infrastructure REITs have well met investors' investment needs for commercial real estate on the one hand, especially the first batch of listed consumer infrastructure REITs have relatively high-quality commercial projects, and on the other hand, they have improved the investment cost performance of REITs.
- How to improve operating performance and ensure the stable operation of assets by updating business models, enriching business categories, promoting marketing innovation and creating consumption scenarios have posed challenges to consumer infrastructure REITs.
- In order to enhance the market size and influence of REITs, we can start from the supply side, and for projects with certain issuance potential, but with problems such as low level of operation and management, unstable income and unclear property rights, we can use Pre-REITs to acquire existing projects for transformation and upgrading, shorten the project cultivation period, and thus speed up the project issuance process and success rate.
Since 2024, the first batch of three consumer infrastructure REITs in mainland China have been successfully issued, with an issuance scale of 8.923 billion yuan, and listed and traded in March, marking the steady expansion and expansion of the mainland infrastructure REITs market. Driven by consumer infrastructure REITs, the number of REITs products has reached 35, and the market size of REITs has exceeded 100 billion yuan, entering a new stage of development.
Consumer infrastructure REITs have broad development prospects
● Overseas commercial real estate REITs occupy an important position
REITs originated in the United States, and in 1960, the REITs Act was passed by Congress as a subsidiary of the Cigar Excise Tax Expansion Act, which allowed ordinary individual investors to buy a share of a commercial real estate portfolio, while previously only wealthy individuals and corporations could invest in large-scale real estate projects, such as shopping malls, through financial intermediaries. It can be seen that the purpose of REITs is to aggregate the resources in the hands of ordinary investors and provide ordinary investors with the same investment opportunities as the American elite. After the passage of the REITs Act in the United States, the first REITs product issued in the United States in 1961 was a retail commercial real estate REIT.
After more than 60 years of development, the asset types of REITs in the United States have been continuously enriched, and the market size has been expanding, and the current market size of REITs in the United States is 1.25 trillion US dollars, which is the largest REITs market in the world, and commercial real estate REITs have always maintained an important position in the US REITs market. According to statistics from the National Association of Real Estate Investment Trusts (NAREIT), as of January 2024, the number and size of commercial real estate REITs in the United States ranked first among all REITs types, accounting for 20% of the total number of REITs and 15% of the size.
● The scale of consumer infrastructure assets in mainland China is huge
According to the latest policy, urban and rural commercial network projects such as department stores, shopping malls, and farmers' markets, as well as community commercial projects that ensure basic people's livelihood, give priority to supporting the issuance of infrastructure REITs. At present, the mainland has a huge stock of commercial assets and maintains a rapid growth momentum. Wind data shows that in 2022, there will be more than 6,000 shopping malls owned by retail businesses across the country, with a business area of 490 million square meters, with a compound annual growth rate of 18% in the last decade. It can be said that the huge stock assets and considerable incremental assets in the future provide sufficient high-quality project resources for the issuance of consumer infrastructure REITs, supporting the continuous expansion of the REITs market.
● The role of consumption in driving economic growth continues to increase
In April 2020, the country proposed for the first time to "build a new development pattern with the domestic cycle as the main body and the domestic and international dual cycles promoting each other", and consumption, as the end point of the circular economy, plays an irreplaceable role in promoting the formation of a new development pattern of dual circulation and improving people's living standards. As one of the "troikas" driving economic growth, consumption has accounted for more than 50% of GDP's final consumption expenditure since 2013, and the proportion has continued to rise since then, and the role of consumption in driving economic growth has continued to increase. After 2020, due to the impact of the new crown epidemic, the proportion of consumption has decreased slightly, but it will not change the long-term upward trend. The continuous growth of consumption has also driven the development of the consumer infrastructure industry, bringing huge development space for consumer infrastructure REITs. The Ministry of Commerce has designated 2024 as the "Year of Consumption Promotion", which is expected to promote the continuous expansion of consumption. The China Securities Regulatory Commission (CSRC) is also actively promoting the implementation of eligible consumer infrastructure REITs projects, so as to better revitalize existing assets, expand effective investment and boost consumption.
The listing of consumer infrastructure REITs is significant
●Enrich the types of REITs and promote the expansion of the market scale
The mainland infrastructure REITs market set sail on a pilot basis in June 2021, with the first batch of nine REITs issued with a total scale of 31.4 billion yuan, covering four underlying asset types: industrial parks, warehousing and logistics, ecological and environmental protection, and toll roads. Although the overseas REITs market has been developed for more than 60 years and is a relatively mature financial product, mainland REITs have been highly innovative in the pilot stage, aiming at the product positioning of better serving the infrastructure industry, and have launched unique franchise REITs, accounting for more than half of the REITs market. With the positive results achieved in the pilot stage of REITs, it has entered the stage of normalized issuance, the REITs market has developed rapidly, the pace of innovation has accelerated, while the number of issuances has increased, the underlying asset types have been further expanded to clean energy, affordable rental housing, etc., the issuers have further expanded from central and state-owned enterprises to private enterprises, and 4 REITs will complete the first expansion in 2023.
In 2024, the listing of consumer infrastructure REITs will further enrich the underlying asset types of mainland REITs, and the mainland REITs market will usher in new development opportunities, which will further enhance the scale and vitality of the REITs market and promote the faster development of the REITs market.
●Lower the threshold for investment in commercial assets and improve the cost performance of REITs investment
From the perspective of the development history of overseas REITs, commercial real estate REITs have always occupied an important position, which also fully demonstrates the enthusiasm and motivation of investors for commercial real estate investment. As a convenient investment tool for ordinary investors in mainland China to invest in commercial real estate, consumer infrastructure REITs on the one hand lowers the threshold for commercial real estate investment and well meets the investment needs of investors for commercial real estate. The correlation of bonds and other major types of assets is low, which can give full play to the advantages of asset allocation, and there are certain differences in the secondary market trends between different types of REITs, so the listing of consumer infrastructure REITs can still play a certain role in diversification, further improve the cost performance of REITs portfolios, and better meet the diversified investment needs of different investors.
●Build a virtuous cycle system to promote the development of the consumer infrastructure industry
Generally speaking, consumer infrastructure has strong social service attributes and service value, but for participating enterprises, it is often high investment, long return cycle, and long-term high debt operation, and in the long run, the motivation of enterprises to participate in the construction of consumer infrastructure is weakened. Through the issuance of REITs to package assets for listing, it can broaden the financing channels of enterprises, accelerate the construction of a virtuous cycle of "investment, financing, construction, management and withdrawal" for enterprises in the consumer field, effectively reduce corporate liabilities, realize the transformation of enterprises from heavy assets to heavy operations, and help enterprises transform to in-depth operation strategies, thereby improving the operational efficiency and valuation level of infrastructure assets and improving consumer service levels. For the industry, a wider range of social capital to participate in investment in the field of consumer infrastructure through REITs can revitalize the huge stock of consumer infrastructure assets in the mainland, promote the construction of incremental assets, optimize consumption scenarios, stimulate market potential, further boost consumption, expand domestic demand, and better play the role of consumption in driving economic growth.
The development of the mainland's consumer infrastructure industry is inseparable from the in-depth participation of private enterprises. From the perspective of the original equity holders of the first batch of 4 approved consumer infrastructure REITs (3 listed and 1 to be issued), central enterprises and private enterprises account for two, which shows that the regulator treats all types of enterprises equally, and is committed to promoting different types of enterprises to give full play to their respective advantages and jointly promote the high-quality development of the consumer infrastructure industry with the help of REITs.
Advice on the development of consumer infrastructure REITs
●Give full play to the ability of active management and pay attention to the operational soundness of REITs
The operating conditions of REITs after listing not only determine the level of REITs' dividend yield, but also a very important factor in determining the performance of REITs in the secondary market. Mainland infrastructure REITs are divided into franchise REITs and property rights REITs, and consumer infrastructure REITs belong to property rights REITs, while there are certain differences in the asset management of different types of REITs.
Specifically, concession REITs ultimately purchase the right to operate infrastructure projects within a certain period of time, and the land use rights of the projects are usually obtained through government allocation, and their asset management has a certain degree of exclusivity and monopoly; Measures such as enriching business categories, promoting marketing innovation, and creating consumption scenarios to improve operating performance and ensure the stable operation of assets have all posed higher challenges to consumer infrastructure REITs.
From the perspective of REITs product structure, mainland infrastructure REITs use public funds to hold asset-backed securities (ABS), then hold the equity of the project company through ABS, and finally hold infrastructure assets through the project company. The policy stipulates that the first two must be the same company or controlled by the same shareholder, while the external operating institution is usually the original equity holder or its holding company hired by the fund manager. The separation of asset ownership and control adopted by mainland REITs, also known as the external management model, requires fund managers to give better play to their active management capabilities, coordinate with external asset operating institutions, reverse the unfavorable situation as soon as possible, and ensure the stable and sustainable operation of infrastructure assets when there are certain problems in the operation of infrastructure assets.
●Actively promote the expansion of REITs to enhance risk resistance and increase activity
At present, the overseas REITs market presents the characteristics of a small number and a large single scale, in fact, the scale of overseas REITs is also small when they are first listed, because REITs usually have leverage ratio restrictions, and most of the income of REITs has to distribute dividends to investors, so REITs mainly achieve scale expansion through expansion and acquisition of new assets. At present, there are 4 equity REITs in mainland China that have completed their expansion in mid-2023, and the total share of the expansion accounts for 42.52% of the total share of REITs. The expansion of REITs is crucial to the development and growth of infrastructure REITs in mainland China, especially for property rights REITs such as consumer infrastructure. Specifically, the significance of the expansion is as follows: first, to attract new investors to join, quickly expand the scale of REIT, make infrastructure assets more diversified, improve REIT's ability to resist risks, and avoid large fluctuations in the secondary market transactions of REITs due to the operational risks of a single asset. Second, giving full play to the role of REITs as a professional operation platform for infrastructure assets, including more and more high-quality assets, can enhance the attention and trading activity of REITs, realize the fair valuation of infrastructure assets in the capital market, and promote the stable and healthy development of the REITs market.
●Introduce professional institutional investors and do a good job in individual investor education
In the long run, REITs have the advantages of relatively stable product income and dividends, low correlation with stocks and bonds, and can effectively resist inflation. Specifically, on the one hand, we can continue to liberalize the investment scope of REITs, encourage long-term funds such as public funds, social security funds, insurance funds, pensions, enterprise annuities and provident funds to invest in the REITs market, and improve the efficiency of portfolio asset allocation; The development and growth of professional institutional investors can introduce long-term funds into the REITs market and improve the liquidity of the REITs market, while professional institutional investors have certain investment and research advantages and information advantages, which can better play the value discovery and asset pricing functions of the REITs market and play the role of a stabilizer of the REITs market.
Compared with ordinary public funds, REITs products are relatively complex, and the current REITs market is not large, so the proportion of individual investors in the REITs market is still relatively low. Individual investors generally lack risk awareness and are more susceptible to emotions and personal behaviors when making investor decisions, showing the characteristics of blindly following the trend, frequent trading, pursuing short-term returns and lack of investment plans. In the future, with the development of the REITs market, the group of individual investors will also expand, which may increase the volatility of the REITs market, so it is necessary to continue to do a good job in investor education, so that individual investors are more familiar with the market fluctuation risk of REITs as equity products, and pay more attention to the long-term investment value and allocation value of REITs, reduce short-term return expectations, and avoid the frequent occurrence of irrational trading behaviors such as excessive chasing up and down.
●Cultivate high-quality assets through Pre-REITs and accelerate the pace of REITs listing
According to the policy requirements, infrastructure projects that issue REITs require clear property rights, a project operation time of not less than 3 years in principle, and requirements for the stable operation of infrastructure projects in the future, such as concession projects, the internal rate of return (IRR) of the fund duration is not less than 5% in principle, and the annual net cash flow distribution rate is expected to be not less than 3.8% in the next 3 years for non-franchise projects. In order to enhance the market size and influence of REITs, we can start from the supply side, and for projects with certain issuance potential, but with problems such as low level of operation and management, unstable income and unclear property rights, we can use Pre-REITs to acquire existing projects for transformation and upgrading, shorten the project cultivation period, and thus speed up the project issuance process and success rate. Pre-REITs are also a model often used by overseas successful commercial real estate REITs to cultivate assets, and the mainland can also learn from this model to cultivate high-quality assets through Pre-REITs, so as to help accelerate the pace of REITs listing.
(Editor in charge: Xue Xiaoyu)
