REITs expected to make financing easier for new infrastructure construction
By Chen Tong
The Chinese government is eager for additional infrastructure projects nationwide and has come up with Real Estate Investment Trusts (REITs) to help finance them. But experts believe fully implementing the trusts is likely to take some time as Chinese investors need to digest the proposal.
REITs are put together by brokers to channel funds into specific property projects. Institutional investors are usually the major target for REITs as they can make financing projects easier and faster. And the idea of REITs is not new as the real estate market has been talking about them for decades.
REITs are long-term securitized products. The yields come from the income generated by the real estate project. For example, those for a product invested in long-term rental apartments come from the rents. But the profits are not quick. That's why industry insiders believe REITs are especially suitable for new infrastructure projects such as 5G base stations and transportation projects which take a long time to build and to make profits.
"One advantage of REITs is that most investors have always been institutional investors, while individuals only contribute small amounts," said Chen Ji, senior analyst at the Bank of Communications.
In the United States where the market for REITs is mature, their overall value has reached 1.3 trillion U.S. dollars, with infrastructure projects accounting for 31 percent. And last month, China announced it will launch a pilot program to allow the issuance of REITs backed by profit-making infrastructure projects.
The statement was jointly issued by the National Development and Reform Commission and the China Securities Regulatory Commission, aiming to make financing easier for new infrastructure construction.
"Certain types of assets are more appropriate for long-term investors who may hold the assets for 10, 20, 30, or 40 years. Not necessarily in yield growth, but on the income derivative forms of assets, where the restructuring comes in. It's not about growth but more about the revenue that assets generate. That's more appropriate to restructure," said James Macdonald, head of research at Savills China.
As most REIT investors are professionals, Chen considers that the new pilot program could speed up the capital allocation process of new infrastructure projects.