China’s expanded Reit programme to ease funding for commercial property landlords, widen choices for investors

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China’s expanded Reit programme to ease funding for commercial property landlords, widen choices for investors

China is giving the nation’s property sector another boost by allowing commercial landlords to pool and float their assets via public real estate investment trusts or Reits, as Beijing expands its three-year old experiment to deepen the local capital market.

The China Securities Regulatory Commission (CSRC) updated a directive earlier this month by including “consumption-related infrastructure projects” such as shopping malls and department stores, as part of its Reit programme.

The move is to “provide investors with a wider variety of options, promote the healthy development of the public market for Reits, as well as improve the ability of capital markets to service the real economy,” the regulator said.

“The property sector is undergoing policy adjustments and the CSRC is loosening restrictions around the funding issue,” said Shen Meng, director at Beijing-based investment firm Chanson & Company. It reflects China’s effort to improve liquidity in the real estate market, rather than specifically help troubled developers ease their debt problems, he added.

The entrance to the China Securities Regulatory Commission office in Beijing. Photo: LightRocket via Getty Images

China first introduced the Reit programme in April 2020, limiting the eligible assets to only large-scale infrastructure developments like toll roads, industrial estates, sewage treatment plants, and logistic warehouses. It was broadened in July 2021 to include assets or projects related to renewable energy, affordable housing, and tourism.

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Reits are investment vehicles that derive a regular and stable stream of income from their underlying assets. They also pay regular dividends, typically in the form of new units, to investors.

The CSRC said eligible companies will issue Reits under the guidance of the regulator. In an earlier notice in March preceding this month’s policy tweak, the regulator stipulated that funds raised from Reits should be used to “satisfy the demand of consumers” rather than develop residential and commercial properties.

In China, 28 public Reits have been created up to this month, with 19 listed in Shanghai and nine in Shenzhen. Sixteen of them are property rights-related, which account for 42 per cent of the total market value, while 12 are operating rights making up the remaining 58 per cent, according to a Xinhua report last month.

The new Reit scheme may need further development before it can really gain traction, says Brock Silvers at Kaiyuan Capital in Hong Kong. Photo: Handout

The market is focused on infrastructure-related projects, and “remains small compared with mature markets, at around 1 per cent of the US Reits market,” Fitch Ratings said in a report in April.

Brock Silvers, managing director at Hong Kong-based Kaiyuan Capital, said the impact of China’s expanded Reits could be limited. Retail consumption may not be a naturally large or robust segment, while China is still likely to see new sports facility projects or development of public spaces that could boost retail sectors.

“This type of government-driven infrastructure, however, has a poor financial track record,” Silvers added. “The new [expanded] scheme itself may need further development before it can really gain traction.”

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