Experts highlight role of quality assets in expanding REITs pilot program

China should encourage local governments and companies to bring a larger number of quality assets into the real estate investment trusts (REITs) pilot program to expand the size and scope of REITs, said industry experts at an online conference releasing research findings on China's publicly traded REITs.

Xiao Gang, a member of the 13th National Committee of the Chinese People's Political Consultative Conference and former chairman of the China Securities Regulatory Commission, said the country should include all types of assets suitable to join the pilot program for REITs as soon as possible and accelerate the expansion of the program, in order to build a brand-new financial system pursuing high-quality development around the theme of REITs.

Participants of the pilot program must work together to find facts about REIT projects, build a classified project database, further strengthen the coordination among relevant departments of the central government and local governments, and speed up the approval of REIT projects, said Xiao at the conference recently held by the Research Center for Real Estate Finance at the Tsinghua University PBC School of Finance.

Earlier last month, Li Chao, vice-chairman of the CSRC, said the securities regulator will further expand the pilot program for REITs to cover more infrastructure fields such as new energy, water conservancy and new infrastructure.

In addition, China will accelerate the development of affordable rental housing projects in the REITs market, and conduct research on expanding the pilot program to cover market-oriented long-term rental and commercial real estate sectors, Li said at a forum on Dec 8.

Expanding the scope of the REIT pilot program and allowing more types of assets to be included in the program will help China's publicly traded REIT market to grow further and become mature, said Zuo Fei, managing director of the investment banking committee and co-general manager of the fixed income financing department of China Merchants Securities Co.

Participants and investors in the REIT market should pay more attention to the additional offerings of infrastructure REITs, which will demonstrate the sustainable development capacity of REIT products as a platform for the listing of assets, Zuo said at the online conference.

China's public REIT market has developed rapidly since the country kicked off a public REIT pilot program in the infrastructure sector in April 2020, allowing certain types of infrastructure projects to be listed as part of the efforts to revitalize existing assets and expand effective investments.

As of Dec 30, a total of 25 infrastructure REITs had been approved for registration in the country. Among them, 24 had been listed on the Shanghai and Shenzhen bourses, raising 78.36 billion yuan ($11.55 billion), with a combined market capitalization of 85.5 billion yuan, according to market tracker Wind Info.

Currently, three major types of underlying assets — highways, industrial parks, and warehouses and logistics — account for nearly 85 percent of the combined market capitalization of domestic infrastructure REITs, said Liu Weimin, general manager of CITIC Goldstone Fund Management, an investment arm of CITIC Securities Co.

Publicly traded REITs still have much room for growth in China in terms of market capitalization and their underlying assets are expected to further expand, Liu said.

"According to our observations of REITs in the United States, we will see a divergence in the performance of REITs in China by the types of assets in which a REIT invests," he said.

Generally speaking, REITs invested in office buildings and hotels are cyclical, in other words, more affected by changes in the economic cycle. On the contrary, REITs invested in rental housing projects are non-cyclical, which means their performance is not closely related to economic cycles, he added.