February
19, 2021
China officially launched publicly offered real estate investment trusts
(REITs) in the infrastructure sector in 2020, seeking to invigorate the
country’s large-scale infrastructure investment and financing market.
This could promote China’s new “dual circulation” development pattern, and it
marks a milestone in the development of China’s capital markets and the
guidance for equity investment in the infrastructure sector.
Figure 1: Structure
of a typical REIT
Source: CICC Research
Overview
China’s REITs help create a market and pricing standards for infrastructure
Launch of China’s REITs could help create
market for infrastructure. While some real estate-related assets such as warehousing
and logistics facilities and data centers already have primary and secondary
markets in China (despite being less mature and transparent), the investment
and financing market for infrastructure remains almost absent.
As such, China’s REITs could play an important role in the establishment of an
investment and financing market for China’s sizeable infrastructure assets.
This may be a prerequisite for value preservation and appreciation of infrastructure
assets, as well as marketization of infrastructure development, investment and
management.
REITs and households
Overseas households have considerable
exposure to REITs. According to relevant statistics, about 40–45% of US
households directly or indirectly hold REIT products, mainly through pension
funds. Some households directly buy REIT-related ETFs or publicly offered funds.
Considering that equity REITs account for only 3–4% of the market cap of the US
stock market, the allocation of US households to REITs is quite common.
Chinese households’ allocation to
physical assets may have peaked and they could potentially allocate more to
financial assets. In 2019, housing accounted for 59.1% of the asset
allocation of Chinese households. Going forward, Chinese households could potentially
allocate more assets to financial and capital markets.
Judging from the overseas experience, REIT products with stable returns could become
an important part of the asset allocation for Chinese households. At present, Chinese
households can only gain exposure to the real estate market by buying property.
If China’s REITs expand to commercial real estate in the future, they could
potentially provide Chinese households with more diversified, flexible and
liquid options to invest in the real estate market.
Figure 2: Real
estate accounted for almost 60% of total asset allocation of Chinese households
in 2019
Source: PBoC, CICC
Research
Figure 3: US
households have balanced allocation between financial assets and real estate
Source: The US Fed
Survey of Consumer Finances, CICC Research
Chinese investment institutions’ exposure to physical assets appears to have
large upside potential
Chinese investment institutions still
focus on bonds and stocks; their exposure to physical assets is limited but has
upside potential. We find China’s leading long-term investment institutions
only allocate less than 1–2% of their assets directly to physical assets (excluding
quasi-bond non-standard products). This is mainly due to the underdevelopment
of the relevant market. Development of China’s REITs and the entire infrastructure
investment market may create new options for institutional investors’ asset
allocation.
Investment in physical assets through funds and REITs could encourage direct financing
China’s physical asset investment shows
strong characteristics of bond investment. Investment in physical assets
through funds and REITs could better
encourage direct financing, achieve effective risk control, gain access to the
capital market, and support the building of specialized operation capabilities.
At present, China’s real estate and infrastructure construction still rely
heavily on the traditional model of “balance sheet and debt financing.” This
model may not be able to meet the needs of sophisticated management given the increasingly
complex market environment and investment targets, and may not be able to ease
asset risks through reasonable diversification.
Formation of multi-level investment and
financing system through capital market could be key. It may be necessary
to improve the basic investment and financing model and promote the development
of REITs (and fund manager models) to build a more flexible and suitable
investment and financing system for real estate and infrastructure. This could
be an important part of the supply-side reform in the physical market and the
capital market.
In addition, it may also offer important opportunities for investors to further
diversify investments and improve asset allocation. Given the considerable size
of China’s physical assets, innovation of investment and financing tools and
models may be important to the circulation of physical assets through capital
market innovation that benefits both suppliers and investors.
For more details, please see our report China infrastructure REIT research
series: The general report published in February 2021.