China's securities regulator, the CSRC, has granted approval for the nation's first publicly traded REITs focused on consumption-related assets. This move comes as part of broader efforts to bolster the property sector, expanding the scope of REITs to include properties associated with SCPG Holdings, Shanghai Xingxiumao Business Management, and the commercial unit of China Resources Land. Despite the approval, concerns persist within the market due to Beijing's prior crackdowns on property sector leverage and challenges faced by major developers. Investors remain cautious, with some expressing heightened scrutiny towards these newly approved financial tools.
The China Securities Regulatory Commission (CSRC) has given the green light to three applications for the nation's first publicly traded REITs focused on consumption-related assets. Despite approval, market observers anticipate subdued interest due to lingering apprehensions about the real estate sector, with the endorsed REITs linked to properties owned by SCPG Holdings Co. Ltd., Shanghai Xingxiumao Business Management Co. Ltd., and the commercial division of China Resources Land.
The Shanghai and Shenzhen exchanges disclosed on Sunday and Monday that the three applications had received approval. Typically categorized as consumption-related infrastructure projects, these involve shopping malls, supermarkets, and other retail-oriented properties. This approval follows China's decision in March to broaden the range of REITs to include consumption-related properties, aiming to support the struggling real estate sector. These REITs facilitate the flow of investor funds to property owners and provide developers with an avenue for exiting their investments.
Following Beijing's persistent efforts to curb leverage in real estate, coupled with a decline in sales and defaults from major Chinese developers, investors are cautious. A trader at a bank's wealth management division emphasised heightened scrutiny towards the new products. He mentioned that he has already divested the REITs held by the bank, citing a decline in returns.
REITs were introduced in China in 2020. China's emerging REITs market is valued at around $14 billion, a fraction of the more established $1 trillion U.S. REIT market. Until now, the CSRC had only sanctioned REITs linked to affordable housing, as well as some industrial and infrastructure projects. Publicly issued by mutual funds, REITs in China have underperformed, with a REITs index initiated in 2021 by the China Securities falling 27% this year, approaching record lows.
Huaxia China Communications Construction Expressway, which achieved a record with its REIT being oversubscribed by 100 times from public investors in 2022, has experienced a 40% decline since its launch.
Christina Zhu, an economist at Criat analytics firm, emphasizes the importance of pricing, noting that historical instances indicate REITs sometimes presented overly optimistic future cash flows from their underlying assets to boost their valuations. Ben Charoenwong, an assistant professor at the National University of Singapore, stated that REITs continue to mirror underlying economic fundamentals. With aggregate demand, particularly driven by consumer spending, slowing down in China, retail REITs will probably continue to suffer.
Though China is taking many initiatives to bring back its ailing real estate sector, most of the efforts have failed in getting any substantial results. In such a situation, the world watches keenly whether this consumption-asset backed REIT would be a success or not.
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