Key investment points
China’s real estate market has officially changed from the era of increment to the era of stock. China’s REITs market has great potential and is expected to reach the level of 100 billion. In the short term, considering the huge scale of China’s infrastructure stock and the fact that PPP projects can provide a large number of asset sources for REITs, the market scale of China’s REITs is expected to reach 2-5 trillion yuan in the next five years. In the long run, considering the rapid growth trend of China’s total fixed capital, the expansion of the underlying asset categories of REITs and the promotion of urbanization strategy in the future, the market scale of China’s REITs is expected to reach 100 billion in the future.
REITs has now developed into an important part of the global capital market and become a major asset allocation category, with an average annual return outperforming US stocks. REITs originated in the United States in 1960. At present, 44 countries and regions around the world have launched REITs system. As of December 31, 2021, the market value of listed REITs in the world is about $2.9 trillion, of which the United States is the largest REITs market in the world. The total market value of listed REITs is about $2 trillion, accounting for about 68.4% of the total global market value of REITs. The investment value of REITs is reflected in its high yield of “shares” and low volatility of “bonds”. REITs is a high-quality anti inflation asset with excellent risk diversification. In the long run, there is an obvious positive correlation between the change of real estate yield and the change of inflation rate, indicating that REITs has strong anti inflation ability. At the same time, the correlation coefficients between American Equity REITs, S & P 500 index and Barclays Capital US composite bond index are 0.58 and 0.19 respectively, far lower than 1, indicating that REITs can effectively disperse investment risks. Holding REITs for a long time can not only enjoy stable dividend income, but also enjoy the income brought by the appreciation of underlying assets. According to NAREIT statistics, from 1972 to 2019, the average annual return of the S & P 500 index was 12.1%, while the average annual return of FTSE NAREIT all equity REITs was 13.3%. REITs outperformed US stocks in investment income.
China has accumulated enough experience in the field of REITs in the past, and infrastructure REITs will help accelerate industrial development. China’s public infrastructure REITs was officially launched in 2020, focusing on seven key industries such as new infrastructure, transportation, municipal utilities, warehousing and logistics, pollution control, information network and industrial parks, and then further expanded to clean and low-carbon energy projects. Before the formal pilot, China has accumulated rich experience in the field of REITs, and there are two main ways to explore: 1) try to issue REITs products with domestic assets as the investment object in the overseas market. 2) Launch similar REITs products under the existing regulatory legal framework in China. Infrastructure REITs can actively manage and effectively revitalize the stock, which will help accelerate industrial development.
Public REITs have been highly concerned by the market, and the rate of return is environmental governance > warehousing and logistics > Industrial Park > expressway. Up to now, a total of 11 public offering REITs have been listed. Their underlying assets have been in operation for a long time and their asset operation is relatively mature. The asset types cover four categories: industrial parks, warehousing and logistics, highways and environmental governance. Overall, the investor structure of the first and second batch of infrastructure public REITs is mainly invested by strategic investors. The strategic placement subscription share of the first batch of public REITs accounts for more than 55%, and the second batch is further increased to 70%. At the initial stage, the secondary market of REITs performed well and generally achieved high returns. As of December 31, 2021, the average relative issuance price of the first nine public offering REITs increased by 25.29%. From the perspective of income structure differentiation, the cumulative rate of return of REITs with small issuance scale after listing is relatively high, and the rate of return of different asset types shows differences: environmental governance > warehousing and logistics > Industrial Park > expressway. Under the background of “double carbon” policy, the market is optimistic about the future development prospect of environmental protection investment products, and environmental governance products perform best. The ability of Expressway infrastructure assets to generate income is generally weak. Combined with the impact of the epidemic, the overall rate of return is the lowest among the four categories of products.
Investment suggestion: public offering REITs, as an investment product with both equity and debt, can enrich investors’ allocation choices. The expansion of REITs will bring more investment opportunities, and we can continue to pay attention to the newly listed REITs products. The asset side of publicly offered REITs generates dividends and asset appreciation income, and the product side can generate capital gains due to the valuation changes in the secondary market. It will become an important investment variety with both equity and debt, which can enrich the allocation options of investors. At present, the price of listed REITs in the secondary market generally increases significantly compared with the issuance price, so we should be vigilant against the decline of its internal rate of return. Public REITs are more suitable for long-term holding. We should rationally treat the short-term market performance and focus on the long-term investment value. At the same time, China’s infrastructure stock market is huge, and there are many high-quality assets available for the issuance of REITs. As REITs has gradually become an important financing channel for infrastructure investment, there is more room for public offering REITs products to expand, so we can pay attention to the newly listed REITs products.
Risk warning: the risk of high concentration of underlying assets, market liquidity risk and lower than expected rate of return.
