Practical Applications of Green Infrastructure REITs
On January 16 and 17, 2020, the CSRC emphasized that it is necessary to improve the quality and efficiency of serving the real economy and steadily promote the piloting of infrastructure Real Estate Investment Trusts. For the past ten years, policies on promoting the issuance and development of publicly-listed REITs have evolved step by step. Standard REITs issued overseas and multiple single-type REIT products have been developed domestically to constitute a diverse market practice. At present, the key to further deleveraging remains unchanged and infrastructure financing as a whole is still tightened, REITs should revitalize basic asset compositions and provide solutions to resolve long-term low-cost funding problems in the realm of green infrastructure. This is required to create solid counter-cyclical adjustments tools for high-quality development in order to create new green infrastructure and greenify the existing assets.
Real estate investment trusts (REITs) originated in the United States in the 1960s. REITs work by collecting funds through the issuing of income trust certificates and shares, which are invested in new real estate, operation and mangement of existing portfolios. For investors it is a secure stream of income. REITs main assets are to be found in real estate and related sectors.
China started to explore real estate trust products as early as 2001. Since 2007, various departments have promoted the issuance and development of REITs. In the past two years, with the overall deleveraging of the infrastructure industry underway, the tightening of financing channels, and the increasingly difficult situation for borrowers, the People's Bank of China, the Securities Regulatory Commission, the Housing Construction Department, various exchanges, and some local governments have made more efforts to continuously promote these kind of investment vehicles.
In 2005, Yuexiu REITs were issued in Hong Kong, becoming China's first standard REITs product issued in an overseas markets; in 2014, CITIC Kaihang successfully issued two CITIC Securities with buildings in Beijing and Shenzhen as the underlying assets. In 2015, the Penghua Qianhai project became China's first public REITs product listed on a mainland exchange. In the following years China has issued dozens of single-type REITs products. These public offerings of REITs products has created a rich practical foundation for further growth. In 2019, infrastructure REITs with multiple highways as the basic assets were officially issued, which helped to create a good example for infrastructure asset valuation, cash flow measurement, and equity grading.
In December 2019, Liu Rong, deputy director of the Securities Regulatory Commission's Corporate Bond Supervision Department, stated that it will actively promote the issuance of REITs in the infrastructure sector, revitalize inventory growth, and spur innovation of these financing mechanisms. It is estimated that if new infrastructure is issued in accordance with the standard public offering of REITs products, 4 to 12 trillion RMB of capital could come into play, realising real direct investments to the tune of 20 to 40 trillion RMB.
With the change in policy, it is expected that infrastructure assets could be the first kind of assets to be included in the these publicly-raised REITs. This appears to be the consensus in the relevant decision making departments at present.
From the supply side, assets such as office buildings, retail properties, and warehouse logistics have become the main content of REITs-like products. At present, China's first-tier and second-tier cities have relatively mature commercial real estate. Under the trend of continued tightening of traditional infrastructure and real estate industry financing channels, the aforementioned industries are under pressure to optimize their balance sheets, which will generate additional asset creation, due to the demand and need of supplementary liquidity.
In addition, under the pressure for stable economic growth and the deepening of the concept of green development and the accelerated transformation of high-quality economic development, green upgrade of infrastructure and the development of green buildings are expected to create additional opportunities for in related industries. We project that by the end of 2020, a total area of 100 million square meters will be upgraded to adhere to green standards with the total area of green buildings reaching 1.5 billion square meters.
Graph: Domestic REITs from 2014 to 2019, hundred million RMB
Read the whole analysis in Chinese: 绿色基础设施REITs发展背景及实践应用分析