Once-hot China Reits get slammed as property slump dents demand
A DOUBLE whammy of China’s deepening property crisis and a stock market slump has claimed a victim – real estate investment trusts (Reits).
Reits debuted on the country’s stock market in 2021 with much fanfare, hailed as a way to channel retail investor money into large infrastructure and property projects.
The idea initially caught on, making them one of the hottest investments amid the Chinese government’s infrastructure push and relatively scarce offerings.
Not any more. A CSI gauge of 28 trusts has lost 31 per cent this year, underperforming the benchmark CSI 300 Index by 18 percentage points. All but three of the listed Reits are trading below their debut prices, data compiled by Bloomberg shows.
Some of the hardest hit include Fullgoal Capital Water Close-end Infrastructure Fund – linked to a wastewater treatment project in eastern Anhui province – which has fallen in all but one day over the past month. The CCB Principal Zhongguancun Industrial Zone Close-end Infrastructure Fund, which leases land in Beijing, has dropped nearly 50 per cent this year.
“The performance of Reits depends on the fundamentals of their related sectors, which are largely tied to the macro economy,” said Fu Lichun, co-founder of Beijing Yuntai Capital. “Their prices have gravitated to lows amid poor stock market sentiment. The fact that they are a fairly new asset class does not make them exempt from downturns.”
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China has been experimenting with Reits to tap the world’s second-largest equity market to finance projects that would have otherwise been funded by local governments. The allure of payouts on annual income from operational projects, and potential stock market gains, had attracted retail investors in the early months of their launch.
If successful, they would have been a win-win for individual investors and regional governments, by giving the former affordable access to China’s gigantic infrastructure projects, while lessening the debt burden for the latter.
Yet an unprecedented property market downturn, weak rental demand amid a sluggish economy, and a relentless slide in equity prices have made Reits a losing bet.
About half of the trusts are tied to property market performance as they lease land, office space or apartments. The rest invest mostly in infrastructure, such as roads and environmental facilities.
In September, the Zhongguancun Fund warned of sluggishness in Beijing’s office rental space, anticipating higher vacancy rates and falling prices.
The HuaAn Zhangjiang Everbright Park Close-end Infrastructure Fund in October said that one of its key tenants had surrendered its lease, leading to a drop of 39 percentage points in occupancy rate for one of its properties from a year earlier.
Policy push for the asset class has continued, despite the plunge in shares. A draft guideline issued earlier this month will allow the national pension fund to incorporate such trusts into portfolios. And while the poor performance has raised awareness of the risks, some analysts believe that the slide has made them a better deal.
Reits valuations have become attractive, and it has become apparent that there is a wide disparity between different trusts in their exposure to cyclical impact, Citic Securities analysts including Ming Ming wrote last month in a 2024 outlook note.
“We see opportunities to bargain hunt in the short term, and recommend affordable housing, energy and environment protection trusts.”
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