HONG KONG, 8 July 2021. On 2 July 2021, the National Development and Reform Commission (NDRC) issued the "Notice on the Infrastructure Real Estate Investment Trust Funds (REITs) Pilot " (《关于进一步做好基础设施领域不动产投资信托基金 （REITs）试点工作的通知》). In this notice, the scope of the pilot infrastructure REITs’ underlying assets was expanded by adding social housing and parking lots. The expansion of scope was introduced shortly after the first batch of infrastructure REITs’ debut trading on 21 June 2021, with five on the Shanghai Stock Exchange and four on the Shenzhen Stock Exchange.
The underlining assets of the infrastructure REITs include industrial parks, toll roads, logistics, urban utilities and environmental protection facilities. In addition to the traditional infrastructures mentioned above, "new infrastructures” are also encouraged such as information networks and data centres.
Before the pilot infrastructure REITs, all the REITs issued in China were private except the Penghua Qianhai Vanke REIT (Penghua REIT) listed in 2015 on the Shenzhen Stock Exchange. However, less than 50% of the Penghua REIT was allowed to invest into the property project, while more than 50% requested to invest into fixed-income securities. In addition, Penghua REIT only shared rental incomes with no control over the property projects invested. Compared to the Penghua REIT, the pilot infrastructure REITs have better liquidity and own more equity features.
The pilot infrastructure REITs are structured as mutual funds and 80% of the fund assets have to be invested into an asset-backed security that contains a single infrastructure project. The remaining assets should be invested in qualified securities or AAA credit debts. Mutual fund managers of the REITs have the actual control over the infrastructure projects. The leverage of the fund is capped at 20% of assets, which can be used for maintenance and renovation of the infrastructure.
We believe the launch of pilot infrastructure REITs is to provide more equity financing tools to smooth the deleveraging process in China. In our view, the government is to channel the investments into infrastructure projects to alleviate the debt burdens on local governments and encourage sustainable funding for infrastructure projects. The expansion of the pilot infrastructure REITs’ scope to social housing demonstrates the government’s dedication to support the development of public housing. The move is viewed as a means to avoid the rising housing demand from urbanisation in some cities to weigh the overheating property market. In our view, the infrastructure REITs will benefit those property developers with exposures to the rental business by providing more diversified funding channels. We expect the scope of infrastructure REITs to expand to more sectors in the longer term. In our view, the challenge for the further development of the publicly listed REITs in China will be related to the establishment of relevant legislation system and taxation policies.
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