Since May 2021, when the first batch of nine public Real Estate Investment Trusts (REITs) were approved in China, the market has seen remarkable growth over the past three years. As of April 2024, data from China Asset Management Company indicates that there are now 36 publicly listed REITs on the mainland, with a total issuance scale exceeding 118.4 billion yuan, crossing the trillion yuan mark. This rapid expansion emphasizes the growing importance of REITs within the investment landscape.

The emergence of public REITs has played a pivotal role in stimulating existing assets, increasing effective investment, and broadening investment channels. They fulfill the long-term capital investment requirements of various stakeholders, attracting a diverse array of investors while also continually optimizing their operations through practical applications and improvements.

One particularly appealing aspect of public REITs is their mandatory dividend distribution policy. According to incomplete statistics from industry observers, public REITs collectively distributed dividends exceeding 6.5 billion yuan in 2023 alone. When combined with the dividends from the previous years, the total dividend payouts have topped 9 billion yuan since their inception.

In an interview, Bai Wenxi, Vice Chairman of the China Corporate Capital Alliance, highlighted the mandatory distribution characteristic of public REITs. This statute requires that 90% of the net income earned by the fund be allocated as dividends to institutional and retail investors. Moreover, dividends are distributed based on the actual yield generated by the asset pool, which significantly benefits investors.

The asset types encompassed by these public REITs span seven categories, including toll roads, industrial parks, water utilities, logistics, clean energy, subsidized rental housing, and consumer infrastructure. Such diversification not only promotes beneficial economies of scale but also serves as a model for future projects.

The integration of public REITs with industrial and financial capital is noteworthy. By leveraging governance structures, information disclosure standards, and market constraints inherent in capital markets, REITs are facilitating the transition of enterprises from mere asset holders to adept operational managers. This shift is crucial for enhancing the operational efficiency of infrastructure projects and improving the overall quality of development.

Based on current policies, the classified infrastructure asset types of listed public REITs encompass industrial parks, logistics, subsidized rental housing, ecological protection, energy generation, traffic infrastructure, and consumer facilities. Liu Xuan, Director of REIT Operations at Bosera Fund, stated that there is still a vast potential to explore within sub-sectors of these seven categories. Additionally, pilot policies are encouraging projects in cultural tourism infrastructure, municipal infrastructure, new infrastructure, and water resources, all of which are actively being researched.

Despite the progress made, public REITs have encountered several challenges. Liu emphasized the issues regarding the availability of qualifying assets for issuance and the relatively low activity levels among market participants. In terms of asset pricing, inconsistencies in first market issuance guidelines and disparities in second-market asset valuations remain significant obstacles. Moreover, a lack of standardized review processes for certain types of assets necessitates improvements, affecting market expansion and issuance efficiency.

A chronic issue in the Chinese public REIT market is the persistent lack of market liquidity. According to the Red Soil Innovation Fund, the unique characteristics of REITs have led to lower trading activity and liquidity, exposing investors to substantial risks and potential market volatility.

Investor awareness also poses a challenge. Given that public REITs are a relatively recent addition to China’s investment scene, there is a general lack of understanding among potential investors. This limited comprehension is a key factor inhibiting the broader development of the REITs market.

Moreover, concerns regarding the quality of the underlying assets of certain projects complicate matters. Poor asset quality or ineffective management can directly impact investment returns and market performance of REITs. To mitigate these risks, enhanced assessment and regulatory oversight of underlying assets are needed.

To address liquidity issues, Red Soil Innovation Fund has proposed several remedial actions. First, increasing market supply and expanding market size could create a more active trading environment. Second, incorporating REIT products into exchange-traded funds (ETFs) and industry indices could bolster demand. Third, there’s a need to consistently encourage long-term capital to enter the REITs market, as the allocation ratios for funds of funds (FOFs) remain relatively low. Fourth, refining market maker systems and fifth, optimizing trading mechanisms for REIT products could further enhance liquidity.

Liu noted that under the guidance of regulatory bodies, various stakeholders have undertaken actions to improve secondary market liquidity over the past three years. These measures include establishing a multi-tiered structure for REIT products, broadening the types of infrastructure assets, driving diverse funding sources into the market, refining project review processes, detailing disclosure requirements, and enhancing oversight of intermediary institutions.

As of May 27, data shows a mixed performance in the secondary market, with only 18 out of the 36 public REITs showing positive growth. The standout performer, the CITIC Construction Investment National Electric Power New Energy REIT, experienced a remarkable year-on-year increase of 13.46%. Conversely, the Huayi Zhangjiang Industrial Park REIT suffered the largest decline, with a drop of 28.69% over the past year.

Despite challenges in secondary market pricing, the allure of mandatory dividends continues to draw investors. Wind data reflects that 2023 witnessed 28 public REITs executing dividend distributions, amounting to an impressive total of 6.597 billion yuan. The highest single distribution was made by the CICC Anhui Transportation Control REIT at 1.089 billion yuan, closely followed by the Ping An Guangzhou Guanghe REIT and Penghua Shenzhen Energy REIT, both exceeding 600 million yuan. Notably, two funds managed by Huaxia Fund—the Huaxia China Communications Construction REIT and the Huaxia Yuexiu High-Speed REIT—each executed four dividend distributions in 2023.

Bai Wenxi emphasized the advantages provided by public REITs' mandatory dividend features. For one, they lower the investment threshold, making it easier for retail investors to partake in high-quality assets. Secondly, their stable dividend income offers a reliable source of revenue, promoting long-term financial stability. Thirdly, in an inflationary context, increasing asset pool revenues coupled with fixed REIT dividends can enhance net values, aiding in inflation resistance. Lastly, these REITs induce a value recovery effect; as actual yield rates exceed distribution rates, market prices may decline, allowing investors to purchase additional shares at lower costs, increasing future earning potentials.

Looking ahead, analysts predict that the types of underlying projects for domestic REITs are likely to diversify further, leading to a more diverse investor base. Regulatory authorities are expected to refine legislation, disclosure practices, and operational protocols to foster sustainable growth within the REITs market. A more established and well-structured REITs market will facilitate rational value assessments of related projects and products, ultimately boosting the market’s capacity to stimulate existing infrastructure and real estate assets.