China’s first ever rules for infrastructure real estate investment trusts (REITs) could facilitate financing for new economy companies and offer investors a stable source of income, according to market players.
China previously only had rules for residential and commercial REITs. Although these were released in 2002, it wasn’t until 2015 that the first property trust, Shenzhen-based Penghua Fund Management, was launched.
The guidelines for domestic infrastructure REITs issued by the China Securities Regulatory Commission on August 7 include, among other things, a requirement for the trusts to allocate over 80% of their total assets to infrastructure-based securities. They must also pay out over 90% of core earnings to investors annually.
The rules are aimed at supporting China’s new economy industries, including technology, e-commerce and online gaming firms, according to Patrick Ma, research director at Admiral Investment, a Hong Kong real estate management company.
“[The guidelines] are to finance infrastructure development for sectors that are in line with the government’s preference…especially the new infrastructures related to IT and information network,’ Mr. Ma tells Asia Asset Management (AAM).
“China’s infrastructure REITs will become an investment alternative for domestic investors, with their stable income stream,” he says.
However, he notes that the guidelines only provide a framework for investments, ownership structure and a path to listing, and says Beijing should work on improving tax treatment of the REITs in order to attract more investors.
The new guidelines are a “very positive development”, according to Alvin Loo, head of China at Singapore’s ARA Asset Management.
“Launching the China REITs pilot scheme in the infrastructure sector is a well-considered move by the Chinese government as it is simpler for investors to assess, and the yield is less volatile than those of other types of real estate assets,” Mr. Loo tells AAM.
He believes the first batch of infrastructure REITs that will be launched could be linked to single assets, such as an industrial park or high-tech park in Shenzhen.
China’s REIT market had 123.7 billion RMB (US$17.8 billion) of total assets as of December 2019.