Infrastructure spending has been a key growth pillar for China, and future infrastructure spending, driven by both traditional and green energy projects, will require significant funding.
The first batch of nine C- Reits were listed in late June 2021 — five in Shanghai and four in Shenzhen – as part of an official pilot programme. Issuers included Bosera, Ping An and CICC, and cash will be directed to infrastructure projects such as data centres, industrial parks, warehouses, roadways, sewage systems, and airports. The initial launch size of the C-Reits of RMB 30bn ($4.62bn) exceeded market expectations.
“The recent launch of the first onshore C-Reits is a positive move to widen the financing channel for infrastructure projects from the public to the private markets,” said Pearly Yap, portfolio manager of equity income at Eastspring Investments, Singapore, in a report this week.
Reits are already a popular asset class in other financial centres, such as Singapore, Japan, and the US. “Although the C-Reit market is starting out with infrastructure assets, we anticipate that over time it will expand to other property assets,” said Yap.
She argued that the development of the C-Reits programme has been carefully considered by the authorities, with explicit rules and regulation, which she believes will lead to C-Reits becoming mainstream investment products over time, similar to Reits in other markets.
This pilot launch of the C-Reits saw strong backing by sponsors and strategic and long-term institutional investors. New investors were reportedly re-assured by the rigour of the listing conditions, such as requirements that operations should have been underway for at least three years, dividend yields to be 4% or higher, loan-to-debt ratios to be capped at 28.6% and a minimum cash flow payout ratio of 90%. The keen response from third-party investors (wealth managers, mutual funds, insurers) also led to a seven times oversubscription rate.
According to Standard & Poor’s, China has a large stock of infrastructure assets, which will grow further to meet ambitious construction targets. The ratings agency estimates a $300bn-$735bn investment pipeline over the next decade.
Chinese regulators may approve the listing of Reits outside the infrastructure domain and into commercial properties, such as offices, shopping malls, logistics, and housing. China could therefore become a $3trn Reit market, overtaking the US, currently the world’s largest Reit market and far outpacing the rest of Asia, according to Yap.
Direct investments in residential properties have been the affluent Chinese modus operandi. But, the tighter measures on housing loans, speculative behaviour and an increasingly price controlled market – are major obstacles. Hence, the launch of the onshore infrastructure Reits can provide an avenue for Chinese domestic investors to switch from direct property ownership to investing in a Reit and possibly extend investments into sub-sectors outside of the infrastructure space, according to Yap.
The effect could be to mobilise the country’s savings for critical infrastructure projects, help to reduce property companies’ gearing and expand the financial instruments available in local capital markets. China’s property companies will have access to more cost-effective capital, while investors will have more asset class choices.
While the investment opportunities appear promising, there are challenges. For one, only domestic investors can invest in the infrastructure Reits as of now. They are not yet available on the Stock Connect trading platform, which means that these projects are cannot receive support from international investors — although Yap expects C-Reits to enter Stock Connect next year.