Reits was born in the United States in the 1960s. Under the Real Estate Investment Trust Act of 1960 passed by the U.S. Congress, a reits is a trust fund in which specialized agencies pool funds from the public through the issuance of securities and distribute the comprehensive income of investments to investors in proportion.
First, the development of reits in the United States
U.S. reits make important contributions to economic and social development
Since the implementation of the Real Estate Investment Trust Act in 1960, after decades of accumulation and development, the United States has played an important role in local economic development and resident employment. According to Ernst & Young's U.S. Reits report released in January 2020, as of the end of 2018, the total market capitalization of US REITS (including publicly traded, listed private transactions and private) exceeded $3 trillion and had more than 520,000 assets. In 2018, Reits provided 2.4 million direct jobs in the United States, generating direct labor income of $148.2 billion, full-year dividends of $12.89 billion and interest income of $6.09 billion. Of the full year 2018 investments by US Reits, $4.1 billion was spent on the construction of new projects and $55 billion for routine maintenance of existing projects.
U.S. equity REITS employment by industry is shown in Table 1. It should be emphasized that according to the customary statistical method of the United States, the meaning of "infrastructure" in the US reits industry is different from the concept of traditional infrastructure such as Chinese transportation and municipal administration, mainly referring to new infrastructure such as network broadband, communications, and 5G signal towers.
Second, the US REITS involve a wide range of industries
Equity-based reits own and operate real estate, and the main source of income is the operating income of real estate, which is the focus of the development of REITS in the United States. According to the National Reits Association, there are currently 225 REITS products in the United States, raising a total of $109.4 billion in 2019. Among them, there are 158 equity-based REITs, involving 12 industries, namely data center, medical, infrastructure, mixed operation, residential, office, retail, industrial, agriculture and forestry, hotel, self-storage and others. The total market capitalization and development of equity reits in various industries in the United States are shown in Table 2.
Through the data analysis in Table 2, from the perspective of total market capitalization, it can be found that high-tech related industries such as e-commerce and the Internet occupy a large share of the US REITS market. This shows that investors have shown a strong investment intention in new infrastructure, including high-tech data centers and self-storage. From the perspective of growth rate, it can be found that the US reits high-tech related industries are growing rapidly, and the infrastructure, industrial, and data center industries have a growth rate of more than 40% in 2019, in addition to the reasons for the active participation of investors, the industry is highly digital, easy to optimize and expand the reits business is also an important reason.
Third, the comparative analysis of the difference between China and the United States
Industry differences
Comparing the seven support industries mentioned in the Notice on Doing a Good Job in the Declaration of Pilot Projects of Real Estate Investment Trusts (REITs) in the Infrastructure Sector (NDRC Investment [2020] No. 586) issued in August 2020 with the application industries of US equity-based reits products counted in Table 2 of this article, we have the following findings.
(1) Highway, railway and other transportation projects are the promotion areas of China's reits pilots, but the United States has almost no accumulation of equity reits product experience with toll roads or railways and other transportation projects as the underlying assets. Analyzing the reasons, the United States already has a more mature transportation system, but there are fewer railway projects, and the tolls in highway projects are also very limited, and China's transportation infrastructure, especially the transportation infrastructure with a certain level of income, has more stock assets, which is an important area suitable for exploring the promotion and application of reits.
(2) China will include urban sewage, garbage treatment and resource utilization, solid waste, hazardous waste, medical waste treatment, comprehensive utilization of bulk solid waste, urban water supply, power supply, gas supply, heating and other municipal projects into the scope of reits pilot work, but the United States has almost no equity reits products for such projects. Analyzing the reasons, such projects tend to have stable returns, but at the same time, the market competitiveness of the income level is limited, which is more suitable for promotion in the national pilot stage and help the market accumulate experience.
(3) Reits products such as warehousing and logistics and new infrastructure belong to the areas jointly promoted by China and the United States, but the attitudes of the two countries to commercial fields such as real estate are diametrically opposed. U.S. reits originated in the real estate industry, and the current real estate industry reits market capitalization accounts for about one-third of the total market capitalization. China's pilot clearly excludes real estate projects, which is closely related to the country's strategic positioning of the real estate industry and REITS, and China's promotion of REITS pays more attention to the strategic goal of infrastructure construction. Therefore, China's REITS will also face different market operation methods and regulatory conditions from the United States, and gradually accumulate REITS development experience in exploration, and walk out of a REITS development path that adapts to China's national conditions.
2. Differences in legal subjects
At present, the legal subjects of reits that are commonly used in the world are divided into two types: one is the corporate reits established in accordance with the Company Law of the country, and the other is the contractual public funds under the framework of the Fund Law. The essence of corporate REITS is to directly hold real estate assets and achieve risk isolation through special purpose vehicles (SPV), and then publicly raise funds and list securities such as shares or convertible bonds issued by SPV. Corporate reits typically work deep into an industry, developing new projects within their industry through acquisitions of projects or equity or bond financing to achieve commercial expansion. Such reits usually have the characteristics of large volume, extensive business layout, and interrelated networks of various projects. Contractual reits hold real estate assets through investment in asset backed securities (abs) through publicly offered securities investment funds, which is essentially a "public fund + abs" model.
The United States mainly adopts a corporate REITS legal entity, SPV directly holds and operates real estate and infrastructure, and at the same time completes the listing in accordance with the standards of dividend payment and number of shareholders stipulated by the US law on REITS, and enjoys the tax incentives of REITS and other policies.
The reits pilot currently promoted by China adopts the model of "public fund + abs", which has the advantage of learning from the management experience of public funds over the years, effectively avoiding risks, and achieving a smooth start. From the perspective of legislative cost and design difficulty, contractual reits are most conducive to low-cost and efficient pilots, and are the best solution in the early stage of development. The "public fund + abs" model makes full use of the existing institutional framework, and the CSRC's Provisions on the Administration of Asset Securitization Business of Securities Companies and Subsidiaries of Fund Management Companies (CSRC Announcement [2014] No. 49) has defined the securities attributes of abs, effectively circumventing possible legal disputes over public funds investing in unlisted equity or real estate.
3. Differences in the way and use of funds are withdrawn
U.S. reits sell company stock in a market-oriented manner and then trade it on the open market, and the buyer can be a public fund or other institutional or individual investor. The UNITED STATES REITS is a company-type structure, and the listing of reits is not the sale of project assets, but the sale of the company's equity, which can bring about capital injection and stock price appreciation, providing financial protection for the company's sustainable development. When reits sells the projects it holds, the reason for the sale is usually to consider that the project is no longer in line with the company's strategic development plan, rather than relying on the sale of the project to obtain a one-time large amount of funds.
Because U.S. law requires reits to distribute at least 90% of its taxable earnings to investors in the form of dividends or dividends, it is more difficult for reits to reinvest through corporate profits to achieve corporate expansion. The growth pattern of US reits has been achieved mainly through internal adjustments and external financing. Specifically, there are 3 ways to adjust internally.
(1) Dynamic adjustment of rent. Rent adjustments are the most common way to grow with reits. Due to inflation and rising consumer price index (cpi), rents adjust accordingly to reflect the true value of the building. Rent adjustment rates can be derived by linking rents to inflation and making appropriate calculation adjustments. U.S. rent adjustments typically range from 0.5% to 1.6%.
(2) Asset optimization. Asset optimization refers to the reits to increase the commercial flow of real estate by upgrading buildings to achieve higher commercial value, usually including renovation of shopping malls, new parking lots, and renovation of air conditioning systems.
(3) Capital recovery and reuse. Capital recovery refers to the sale of underperforming assets and the purchase of good assets through the recovery of funds. This requires the right buyer and the target of the purchase, so it is necessary to prejudge the reits market, sell the asset at a higher price at the right time, and bottom out the asset at a lower price. Sometimes, in the absence of a suitable target, reits can pay out the recovered funds as dividends to investors.
There are two main ways to finance externally.
(1) Equity financing. As a legal subject, companies can be listed through an initial public offering (IPO) or a secondary offering after listing. A small number of reits may also offer equity to specific investors through private placements. In 2019, US reits had a total of 111 secondary issuances and 2 IPOs, raising a total amount of US$36.669 billion.
(2) Bond financing. The asset-liability ratio of US reits has a clear upper limit in law, that is, it must not exceed 45%. However, due to the diversity of bonds, there are still many reits that choose to issue bonds for financing, and bonds can be classified according to the repayment period, repayment and interest payment method, and the nature of the guarantee. The most mainstream bonds issued by US reits are senior notes, that is, debts that should be paid preferentially if the company is liquidated. Senior notes are usually medium- and long-term bonds. In 2019, US REITS conducted a total of 133 bond financings, issuing all medium- and long-term senior notes, raising a total of US$63.146 billion.
Different from the United States, under China's "public fund + abs" model, the original equity holder sells project assets instead of the company's equity, which can bring a large amount of funds back at one time. A one-time large-scale capital injection is conducive to solving the company's debt problem, while providing financial support for the construction of new infrastructure projects, which is conducive to deleveraging and is an important investment and financing mechanism innovation. However, compared with the US corporate reits fund withdrawal method, the one-time withdrawal fund model of China's reits may also produce some problems.
(1) The original equity holder can no longer hold and control the project, and when entrusted by the fund manager to continue to operate the project, it is easy to lose the motivation to upgrade and improve the service. Since most of the income of the project is no longer related to the original owner, it is difficult to achieve a continuous increase in the operating income of the project by reducing operating costs and pursuing higher service standards.
(2) It is more difficult for regulators to control the use of recovered funds. IPO, secondary issuance and bond financing and other financing channels need to explain to investors the purpose of the raised funds, investors will be judged for the purpose of the fundraising, unattractive use of funds or contrary to the purpose of fundraising, will lead to the company being eliminated in the capital market. Most of the funds raised by the US reits are used for the expansion of the industry, which is because the company is still controlling the project, coupled with the existence of industry competition, deep ploughing in a field to have competitive advantages and profitability, so the formation of a market regulation mechanism, to promote the company's raised funds can be actively used for the development of the company and the industry, but also easier to meet the national industrial planning.
At present, China's REITS pilot program adopts the method of one-time package sale of the project, and the company may be used for various purposes after recovering funds. Although the current policy clearly encourages the use of recovered funds for major strategic projects, new infrastructure and public utilities within the scope of major strategic areas of the country, there is still a lack of market power to restrain companies from using the raised funds, bringing some uncertainty to the strategic goal of forming a virtuous investment cycle. Therefore, China can appropriately learn from the experience of the United States and appropriately raise the approval standards, such as setting a reinvestment ratio of returned funds. In the United States, more than 75 percent of the assets of a reits company should be retained in the real estate sector.
(3) It is not conducive to the formation of an enterprise ecosystem in some industries. Selling a project is a way to pursue returns, but it will have some impact on the competitiveness of the company's industry. Taking the warehousing and logistics industry as an example, the industry needs a complete logistics system, and needs a large number of warehouses to cooperate with the transportation system to achieve the advantages of economies of scale. If some projects are sold in packages, it may lead to the loss of important nodes in the logistics network, which may have a certain impact on the company's operations.
(Source: Woody, Niu Yunshi, Du Zhenqin, Wang Shouqing. The Stone of His Mountain: A Brief Introduction and Enlightenment of American Reits[j].Project Management Review, 2020(05):34-38.)