China's economic growth is entering a new phase focusing on high-quality development. The Outline of the 14th Five-Year Plan explicitly stated that "to promote the healthy development of infrastructure Real Estate Investment Trusts (REITs), effectively revitalize stock asset, and form a virtuous cycle between stock asset and new investment". After years of exploration, China's public REITs market was established in 2021, with the infrastructure sector as the focal. Today, it is widely agreed among policy-makers, scholars and industry leaders that, we need a comprehensive review of the performance of this new market in order to further develop a sustainable and effective mechanism.

On April 16, the 2022 Tsinghua PBCSF Global Finance Form was held in Beijing, with plenary session III focusing on "Infrastructure Construction and REITs Practices". Experts from policy makers, original asset owners, investors, academic and industry research institutes convened in the session and engaged in an hour-long in-depth discussion. Dr. LIU Bibo, Associate Professor and Assistant Dean, Tsinghua PBCSF, moderated the session.  

LIU Bibo

Promote stable and long-term development of public infrastructure REITs through improving laws and regulations, optimizing operational mechanism, and strengthening investor education

Mr. XIAO Gang, member of the National Committee of the Chinese People's Political Consultative Conference and former Chairman of China Securities Regulatory Commission (CSRC), delivered a keynote speech titled "Promoting the Healthy Development of Public Infrastructure REITs". He emphasized that promoting the public infrastructure REITs market has become an innovative development of national importance. It will help establish a new financing mechanism for the industry, enhance the role of capital market in supporting the real economy, expand the menu of investment products, transform the industry from an asset-growth-oriented model to an asset-management-oriented model, improve market-based pricing mechanism, revitalize assets in place, and enhance the efficiency of asset operation.

Currently, public infrastructure REITs pilot projects has made excellent demonstration effect. However, it is also crucial to analyze market performance and make practical improvement, so as to promote stable and persistent development of public infrastructure REITs. To achieve the goal, Mr. XIAO Gang proposed three policy recommendations: 1. revise existing laws and regulations to establish a set of REITs-focused regulations for issuance, listing, trading, information disclosure and investor protection for the REITs market;  2. optimize the operation mechanism in order to incorporate more high-quality assets into pilot practices, promote better asset operation and capital operation, and form a practical market-based evaluation and pricing mechanism; 3. further enhance investor education, to help investors build a rational and value-based conceptual framework that is long-term oriented.

XIAO Gang

Continuously optimize regulations and promote high-quality development of REITs market

Mr. LU Dabiao, Vice General Manager of Shanghai Stock Exchange (SSE), summarized the staged achievements of public infrastructure REITs pilot practices, and shared views on the REITs market development and the SSE’s work plan correspondingly.

He pointed out that the REITs pilot practice generally met the expectations along a number of key dimensions: an achievable listing scheme fitting current market conditions; the aggregation effect of high-quality pilot projects reflected; an organized REITs market being recognized by investors; market performance exceeding expectations. Mr. Lu further pointed out that, as a new type of financial product, REITs could play a greater role in serving the national economic construction, with all participants coordinating to further the REITs market reform with an innovative spirit.

According to Mr. Lu, SSE will focus on the following aspects in the next stage of China’s REITs market development. Firstly, SSE will promote listings of key and demonstration projects. Secondly, it will improve existing mechanisms for expanding fund capacity and promoting the REITs legislation in a timely manner. Thirdly, SSE will enhance the audit quality and efficiency surrounding REITs listing. Finally, SSE will play a better role in market supervision and investor education so as to protect the legal rights and interests of small and medium-sized investors.

LU Dabiao

Expanding fundraising and asset scope would be an inevitable trend for China’s Public REITs

The Roundtable Dialogue included three distinguished speakers, including Dr. DENG Yongheng who is John P. Morgridge Distinguished Chair in Business of Wisconsin School of Business, University of Wisconsin-Madison, Mr. YU Zhiliang who is Assistant General Manager of China Merchants Shekou Industrial Zone Holdings Co. Ltd., and Dr. ZHANG Yu who is Managing Director of Greater China Property Market, CICC. They exchanged insights on market performance, governance mechanism, transaction structure and the expansion of underlying asset scope of REITs. Mr. ZHOU Yisheng, Deputy Director and Board Member of Research Center for Real Estate Finance, Tsinghua PBCSF, chaired Roundtable Dialogue. He also serves as Co-founder & Managing Partner of GoHigh Capital.

The Roundtable Dialogue

Prof. DENG Yongheng pointed out that affordable housing is the foundation of sustainable social development. Currently, the price-to-income ratio in China’s housing market remains elevated while the housing affordability of urban residents remains insufficient. Therefore, there is an urgent need to develop a long-term sustainable housing market system as well as a safe and stable capital market. REITs will serve as one of the applicable financial instruments. Based on international practices, public REITs, as an investment vehicle, provides more stable returns with lower risk and greater liquidity, compared with other investment products. The launch of REITs could effectively revitalize high-quality underlying assets and increase affordable housing supply.

DENG Yongheng

Mr. YU Zhiliang shared his views that public REITs will essentially improve the investment and financing mechanism in infrastructure sector, therefore improving the alignment between operation and financing for enterprises. For the original asset owners of REITs, one of his key points is that REITs will better align the asset owners with their long-term strategy, helping transform the enterprise from an asset-growth-oriented model to an asset-management-focused model which is the sector’s new trend. Second, we should form a virtuous internal cycle of "investment - operation - revitalization - reinvestment" by revitalizing stock asset and promoting scale. Third, we should levitate the specialized operation capability, upgrading the business model from traditional asset accumulation to asset management by focusing on the value and portfolio of assets. In the meantime, he recommended simplification of the current multi-level structure of REITs through legislation in a long run to more directly engage the original asset owners.

YU Zhiliang

Dr. ZHANG Yu pointed out that since the fourth quarter last year, prices of public REITs have risen rapidly, exhibiting an upward trend in contrast with the declines of stock indices. The reasons are as followed: firstly, long-term returns and stable cash flow make REITs strongly defensive and immune to volatilities in the stock market. Secondly, the underlying assets of listed REITs remain high quality, attracting demand which exceeds limited supplies. Funding expansion in a timely-manner would increase the supply and expand the market scale, so as to further stabilize the price of REITs market. While encouraging more long-term investors to enter REITs market, the government has also been strengthening investor education and disclosure quality.

ZHANG Yu

ZHOU Yisheng concluded that further expansion of public REITs is an inevitable trend from the historical view of the real estate market. Based on international experiences, the launch of REITs will improve the investment and financing mechanisms of the industry, revitalize stock asset, mitigate existing debt problem and promote industry transformation. Overall, REITs play a significant role in revitalizing stock assets and motivating new business activities. Therefore, it is important for regulators and market participants to experiment and discover the right direction of REITs development that suits China’s economic development as related to infrastructure and real estate sector. 

Mr. ZHOU Yisheng concluded the session with a brief introduction of the Research Center for Real Estate Finance, Tsinghua PBCSF. The center has focused on the theories, policies and practices study of public REITs. Under the guidance of National Development and Reform Commission (NDRC), China Securities Regulatory Commission (CSRC) and the Ministry of Housing and Urban-Rural Development(MOHURD), REITs-related research projects have been launched, and a book titled "Publicly-offered Infrastructure REITs: China's Practice and Future Prospects" will be released in 2022. 

ZHOU Yisheng