Investment segment sees 'outstanding' results; more quality projects, rules to be introduced

China will expand its pilot scheme on real estate investment trusts (REITs) backed by income-producing infrastructure projects. REITs have a bright future thanks to their potential for revitalizing stock assets and smoothing the circulation of investment and financing, according to people familiar with the program.

As of Apr.26, China had launched 11 publicly offered infrastructure REITs on the stock exchanges in Shanghai and Shenzhen, Guangdong province, since its first batch of nine infrastructure REITs started trading in June.

The 11 pioneer REITs have so far risen about 30 percent on average since their debuts, and their average turnover rate was 2 percent, said Lu Dabiao, executive vice-president of the Shanghai Stock Exchange, or SSE, at the 2022 Tsinghua PBCSF Global Finance Forum on April 16.

Infrastructure REITs own and manage infrastructure real estate and collect rent from tenants that occupy that real estate, according to Nareit, a Washington DC-based association that deals with the REITs industry.

Lu said the first batch of REITs showed outstanding performance of their infrastructure assets, generating stable cash available for distribution and offering stable dividends, according to their annual reports.

"REITs will have a bright future in revitalizing stock assets and smoothing the circulation of investment and financing, given that China currently has a large volume of high-quality infrastructure assets," he said.

The SSE will push for sustainable provision of quality projects, accelerate efforts to promote a pilot scheme for REITs based on government-subsidized rental housing and vigorously develop clean energy REITs or other REITs for innovation-driven, cultural and tourism projects.

The SSE will act fast to formulate rules on the expansion of the pilot scheme on infrastructure REITs under the guidance of the China Securities Regulatory Commission, enhance REITs-adapted business and trading systems, continuously improve governance mechanisms for REITs, optimize information disclosure, increase the operational efficiency of REITs and promote concerned parties to make a specific law for REITs, Lu said.

Xiao Gang, a member of the 13th National Committee of the Chinese People's Political Consultative Conference and former chairman of the CSRC, said China needs to establish a set of institutional norms adapted to the characteristics of REITs in a number of areas, including issuances, listings, trading, information disclosure and investor protection.

"To address the problems found while running the pilot scheme on infrastructure REITs, China should improve relevant laws, make new institutional arrangements, optimize product design, simplify product and transaction structures, enhance regulatory measures, further clarify the boundaries of responsibility for various market participants, and reduce launch and operating costs of products to promote sustained and sound development of the REITs market," Xiao said at the forum.

Local governments and companies should be encouraged to bring more high-quality infrastructure assets to the pilot program and expand the market size of REITs. The country ought to increase the efficiency of transactions of State-owned assets, implement requirements for infrastructure projects to apply for the pilot REITs program, shorten filing cycles of such projects and accelerate the process of project approval, Xiao said.

China must promote the combination and enhancement of infrastructure operation and capital operation abilities, consolidate the responsibility of fund managers and give full play to strategic management capabilities and operational capabilities of originators to improve governance and project returns, he added.

"Building a highly efficient and transparent mechanism for the expansion of the pilot scheme on infrastructure REITs is conducive to revitalizing stock assets for reinvestment, making platforms promoting the integration of industry and finance bigger and stronger, lowering marginal operating costs and increasing the value of investments in REITs," he said.

In addition, China should gradually form market-oriented evaluations and pricing mechanisms for REITs in accordance with Chinese reality so that originators are willing to issue REITs and investors are willing to invest in such products, Xiao said.