China reits could top US$6 trillion
Beijing may soon approve IPOs of real estate investment trusts to boost ailing property sector
Property assets that can be spun off into publicly listed real estate investment trusts on the mainland could top US$6 trillion by 2020 as the authorities speed up regulatory efforts to get them launched.
Market talk is swirling that Beijing will allow the launch of publicly traded reits as early as next year as part of its efforts to support the ailing property industry.
But analysts say obstacles still remain in the way, not least the unresolved issues of taxation, the scope of such reit businesses and exactly who will be allowed to invest.
A rising number of developers, including industry leader China Vanke, have expanded into non-residential real estate sectors in recent years to build shopping malls, office blocks, distribution centres and warehouses that can generate stable rental income, to reduce the volatility in cash flow and operating profits as growth in housing demand looks to ease.
Those types of buildings are the core components of reits around the world.
Globally, initial public offerings of reits now account for more than 70 per cent of real estate floats, triple the level seven years ago. The average size has been about US$300 million since 2009, according to a report by global financial advisory firm EY.
"So far, the majority of investible assets [on the mainland] are concentrated in tier-1 cities," Johnny Shao, an executive director of investment properties for global consultancy CBRE in China, told the South China Morning Post.
"With the rapid growth of the property market across the country, tier-2 and tier-3 cities will become more important over time, as we have seen institutional investors actively buying and selling investible assets in cities such as Dalian, Chengdu, Suzhou and Tianjin."
Tier-1 cities are Beijing, Shanghai, Shenzhen and Guangzhou. Tier-2 cities are the key provincial capitals, such as Hangzhou and Nanjing. Tier-3 cities are major provincial cities, many of which lie along the eastern seaboard and are some of the country's most developed urban areas.
Citing institutional estimates, Shao said the mainland's investible property assets totalled about US$3 trillion last year and were expected to more than double by 2020.
However, Betty Wong, an executive director of investment services at Colliers International in Shanghai, said the asset pool could be much smaller if equity performance and availability of asset management talent were factored in.
Andrew Ness, the head of North Asia research for DTZ, said the mainland would see 156 grade A office properties - the most likely assets to be injected into public reits at the initial stage - come on stream between next year and 2019, on top of the existing stock of 542 projects providing 29 million sq metres of prime office space in the four tier-1 and 12 tier-2 cities.
That would compress yields if asset prices were stable as rents would soften, and landlords facing funding challenges would quicken the pace of asset disposal, with cashing out through public reits emerging as a new exit channel, he said.
"However, the longer-term strong fundamentals of China's office market will actually induce stronger landlords to hang on to their best assets," Ness said.
Demand for prime properties from domestic institutions including insurers and banks are surging. They are most likely the first batch of investors for public reits when the regulatory framework is finalised.
The EY report shows that globally, reit offerings have underperformed those in the non-reit real estate sector, energy and power, and the financial industry, with a return of 4.9 per cent on a weighted average basis in the first year of listing.
Prime office yields in Shanghai have fallen from more than 7 per cent during the global financial crisis to 4 per cent to 5 per cent recently, according to CBRE data. That, however, is still better than the 2.8 per cent in Hong Kong, 3.5 per cent in Singapore and 3.5 per cent in Tokyo.
"However, if we take into account the finance cost, China has a negative spread over lending rate [of about 7 per cent], but the other markets are still benefiting from low interest rates and thus have positive spread," Shao said.