C-REITs Geared for New Growth Era

After passing the first lithmus test in their debut, C-REITs are now exposed to a further round of policies crucial for their continued development.

By Sigrid Zialcita, Asia Pacific Real Assets Association (APREA) CEO

February 28, 2022 – China REITs (C-REITs) have made a sterling debut on the Chinese bourse, with the initial listings from the pilot programme displaying strong post-IPO performance. Price returns are so far up an average of 30% since listing in June, outstripping the CSI300 over the same period. Oversubscribed during their offer period, it also indicated strong underlying demand for dividend-rich stocks from investors in China’s US$12 trillion stock markets, at a time when the global economy continues to reel from the impact of the pandemic.

Cuts in banks’ reserve requirements, which the country’s monetary authorities first made in July last year, no doubt helped. Earlier-than-expected pay-outs by some of the REITs have also further instilled confidence. The years of deliberation taken to evolve China REITs appear to have been well worth the wait, as the government effectively leveraged on the asset class to push its own social and economic agenda without opening its property markets to excessive risks.

In the aftermath of C-REITs debut, Chinese authorities followed with new guidelines, lifting geographical restrictions, and broadening the types of potential assets to include renewable energy, build-to-rent (BTR) housing, and significant tourist attractions. This effectively loosens the interpretation of critical infrastructure in the C-REIT framework. Its first batch of nine infrastructure REITs, which collectively raised RMB30 billion, were specific on what could be listed, permitting only infrastructure and industrial assets in specific geographies. 

New Round Of Policies

The developments indicate that the government’s rollout of C-REITs has so far passed an essential first-stage litmus test, and the further round of policies is crucial to sustaining the development of the asset class. The additional sectors for inclusion are thoroughly considered, with regards to the country’s familiar five-year plans. The inclusion of renewable energy assets, that explicitly excludes coal, is telling as it is central to its plans to decarbonize its economy by 2060.

Efforts to develop a conducive ecosystem for REITs are also being pushed out. Its finance and insurance watchdog, the China Banking and Insurance Regulatory Commission, late last year gave a nod to insurers to add C-REITs to its investment portfolios. Additionally, a C-REIT focused mutual fund has been launched.

These have set the stage for an overwhelming response to its second batch of IPOs, which were reportedly 47-times oversubscribed by institutional investors. So far, two of four slated offerings – China Yuexiu Expressway REIT and CCB Principal Zhongguancun Industrial Zone REIT – have debuted; both counters have surged 50% on average. The new REITs also featured more liberal use of leverage, which will be supportive of growth.

Sustained Momentum

In the aftermath of the listing frenzy, momentum on the policy front continues to be sustained. Earlier this year, tax relief for new C-REITs were announced. Corporate tax related to asset transfers will be exempted before the REITs are set up and can be deferred during the process. The National Development and Reform Commission urged its local bureaus to step up publicity, cut red tape, and improve services, so that more infrastructure projects can be listed.

The set of developments appears promising, and we can expect more C-REIT listings this year. We can also look forward to another measure that could lie on the horizon. As of now, only domestic A-share investors can buy C-REITs, as these are not yet available on Stock Connect, which is typically how international investors access these shares. We believe this to be an eventuality as it is an important step in the development of C-REITs. Aside from allowing Chinese developers to tap global capital in Hong Kong, it will also internationalize the RMB. In the longer term, REITs will revolutionize the real assets market on the mainland, provide new funding sources and boost growth in the financial and asset management sectors.

Amid heightened regulatory scrutiny of property markets in China, C-REITs represent a sustainable avenue to gain exposure to the sector’s vast potential. The final push to include conventional commercial real estate and the wave of listings that follow will undoubtedly be a massive investment opportunity. But it will be measured, which will likely occur only when prioritized sectors achieve a critical mass of listings that are deemed to have adequately hit strategic milestones. The launch of rental housing C-REITs will therefore be a critical target. 

The process to liberalize the C-REIT market, with moves to include other sectors, will continue to be guided by strategic necessity. There is still a long runway to securitize its infrastructure sector, about US$10 trillion currently by APREA’s estimates that will likely double by the end of the decade due to its rapid economic growth. The authorities’ heavy hand will no doubt be maintained but it is in good hands. Progress has been palpable and there is now more visibility on what lies ahead for the asset class. Like no other government before it, China had leveraged on the structure and elevated REITs into an effective policy tool and a lucrative asset class.

C-REIT	Market Cap (RMB billion)	Price Return since IPO
Avic Shougang Biomass	1.9	44.0%
Bosera China Merchants Shekou Industrial Zone	3.1	47.9%
CICC GLP Warehouse Logistics	7.7	32.8%
Fullgoal Capital Water	3.6	96.2%
Hotland Yantian Port Warehouse Logistics	3.1	67.8%
HuaAn Zhangjiang Everbright Park	2.1	43.0%
Ping An Guangzhou Comm Invest Guanghe Expressway	9.6	4.8%
Soochow Suzhou Industrial Park	4.6	33.0%
Zheshang Securities Zhejiang Expressway	5.1	17.9%
CCB Principal Zhongguancun Industrial Zone	4.7	64.1%
Huaxia Yuexiu Expressway REIT	2.9	35.8%

Data as at 17 Feb 2022

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