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The Xinguiliu Expressway opens to traffic in December 2021, an example of assets that helped launch China’s Reit market. Photo: Xinhua

Reits are China’s latest market darlings as quality income provides anchor in volatile market

  • Prices of 11 infrastructure Reits in China have risen 30 per cent on average since their debuts, while blue-chip benchmarks in Shanghai and Hong Kong tumbled
  • Investors will get more involved in Reits as supply is expected to increase, though analysts cautioned about market fluctuations

Real estate investment trusts (Reits) are becoming China’s latest stock market darlings, as investors whiplashed by roller-coaster rides in the equity market seek buffers that still deliver consistent returns in the industry.

The 11 pioneer infrastructure-backed Reits traded in Shenzhen and Shanghai have risen by 30 per cent on average since their debuts from as early as June last year. That included a 5.2 per cent advance this year, while benchmark stock indices in Shanghai and Hong Kong fell by 9.8 per cent and 5.6 per cent, respectively.

“As the stock market is sluggish and the secondary market lacks the opportunity to [generate] profits, investors are paying more attention to Reits,” said Wang Qunhang, vice general manager at TopMind Asset Management in Guangzhou.

Reits are funds that own, operate and finance real estate projects, generating a stable and predictable flow of rents, service fees and other income as dividends for investors. Their popularity validates the push by financial regulators to expand the number of investable options and divert the nation’s savings away from an over-reliance on equities.

Aerial photo taken in November shows an interchange of the Guilin-Liucheng Expressway in Rongan County, south China’s Guangxi Zhuang autonomous region. Photo: Xinhua

The successful experiment with infrastructure-backed Reits is encouraging market regulators to expand the categories to state-subsidised rental homes and clean energy assets, analysts said.

The Shanghai Stock Exchange (SSE) sought public feedback on a set of draft rules for expanding the scale of Reits funds, as China’s government aims to stimulate the direct financing of infrastructure projects to ease the fiscal pressure on local authorities.

Fullgoal Capital Water Close-end Infrastructure Fund’s price surged 59.3 per cent to 5.893 yuan on April 18 from the listing price of 3.70 yuan on June 21 last year, according to stock exchange data, making it the best performer among its peers.

A migrant worker near a construction site where is a new property plan in Beijing on 21 March 2022. Photo: EPA-EFE

CCB Principal Zhongguancun Industrial Zone Infrastructure Fund advanced 49.5 per cent since December 14 last year, while Hotland Innovation Yantian Port Warehouse Logistics Fund gained 43.2 per cent since its June 21 debut.

The current crop of Reits handed investors 6 per cent on average in terms of cash distribution ratio, according to TopMind’s calculations. Investors are seen rushing into the latest offerings on the promise of stable returns.

The China Communications Construction Expressway Close-end Infrastructure Fund was oversubscribed by more than 16 times last week. The offering attracted 152.4 billion yuan (US$23.9 billion) of bids for 9.4 billion yuan of securities on offer.

Retail investors received a paltry 0.84 per cent of the allocation, the lowest on record among all 12 Reits in the market. The new fund will start trading on the Shanghai exchange on April 28.

An aerial view of the Evergrande Changqing community on September 26, 2021 in Wuhan, Hubei Province. Photo: Getty Images.

As the earliest pilot programme, the assets underlying the 11 Reits were high-quality with stable return, ensuring strong participation among institutional investors, according to some fund managers. Favourable policies, including incentives and state support, also helped boost confidence among investors, they said.

“Investors tend to buy Reits betting on expected returns similar to subscribing to new stocks,” said Che Yang, chief executive of Gen Capital in Shanghai. “But as the speculation has pushed the prices up by 30 per cent, a more balanced stage of performance should follow next.”

The future expansion of the size of upcoming new funds and existing funds could attract more retail investors into the asset class, he added.

“More products will emerge in the market, but investors should be aware that it’s a fluctuating market,” Che said. “The high return [of the segment] could be temporary, and their long-term growth still depends on the quality of the underlying assets.”

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