REIT ASIAPAC MAGAZINE REITASIAPAC AUGUST 2020 ISSUE | Page 5

COVER STORY
government infrastructure assets such as toll roads, seaports,
airports, and public-private partnerships. There was specific
mention that residential and commercial properties would not be
part of the initial program. All assets injected into a C-REIT will
need to be fully owned by the REIT. The inclusion and focus on
infrastructure in the C-REIT programme is principally provided to
allow Chinese municipal governments to deleverage. Surprisingly,
multi-family, which had been long rumoured to be the first asset
class, was not included. Therefore, this latest development of the
Chinese REIT market should be seen as laying the groundwork
for other asset classes to be added in the future after the C-REIT
structure proves its worth and regulatory issues are worked out.
However, this structure has raised concerns for the sponsor that
they could potentially lose control of the underlying assets which
they inject into the C-REIT.
Overall, what is essential for the longterm
success of on-shore China REITs will
be corporate governance and, though the
sponsor will not control the REIT manager,
it appears to have significant influence over
the assets. This should be viewed positively.
LOW LEVERAGE LIMIT,
VAGUE TAX TREATMENT
There were several disappointments for the market. For example,
the 20% loan-to-value limit (versus on-shore pre-REITs at 50-
70% and 50% for S-REITs and HK-REITs), the restriction that
debt can only be used to finance “renovations,” and that all asset
purchases need to be fully equity financed. However, this is
similar to the initial Thai trust debt limits, which were changed
to a REIT structure to allow for higher loan-to-value limit after
several years, as market participants became comfortable with
the new instruments. Therefore, while acknowledging the
shortfalls, our view is that we should give the new programme
the benefit of the doubt and look for improvements to the regime
as the market accepts and gets used to it.
The C-REIT programme is also still vague on tax transparency,
implying that there will not be standardised tax treatment across
asset classes and tax waivers will be on a “case by case” basis.
This will cause confusion for any listing. But if C-REITs have a
similar “equity + shareholder loan” structure as the on-shore, pre-
REITs, the taxable scrape will be lower than the off-shore REITs
listed in Singapore and Hong Kong which pay both corporate and
withholding taxes.
The first batch of C-REITs is expected to launch in the second
half of 2020, with the Chinese media reporting there are 64
C-REITs with RMB 134 billion (US$19 billion) in assets under
management (AUM) in the pipeline. However, it is unlikely all
64 will IPO.
ACQUISITION-BASED GROWTH
The leverage levels will likely limit the yields and growth
potential of C-REITs. C-REITs are expected to generate yields at
or below 5% (c.200bps above 10-year government paper). If only
stabilised, core assets are injected; growth will predominantly
be based on acquisition potential through the sponsor. As debt
cannot be used, placements will be needed on any subsequent
asset purchase; the length of the bookbuild process is unsure,
but appears that any acquisition from the sponsor will require an
EGM, which could lengthen the process.
Overall, what is essential for the long-term success of on-shore
China REITs will be corporate governance and, though the
sponsor will not control the REIT manager, it appears to have
significant influence over the assets. This should be viewed
positively.
Low leverage at the beginning is not all negative, given that
Thailand Trusts and Singapore REITs originally had low gearing
limits, and both had successful total return and asset growth.
But it will limit the overall yield and clarity on placements,
which would be beneficial in light of needing further equity to
grow assets. Despite low leverage, we would still look for high
single-digit total returns to make the investment look attractive,
preferably with the asset of choice being logistics in Tier-1 cities.
Most importantly, we would like to see from the beginning that
C-REITs are strongly supported by domestic investors—both
institutional and retail —like REITs in other markets.
Unlike Hong Kong and Singapore REITs, where a sponsor
externally manages the REIT (The Link REIT being the noticeable
exception), in the proposed structure, C-REIT will be managed
by a mutual fund manager outside the sponsor (for a presumable
fee of 50-60 basis points of AUM). The sponsor will be required
to have a 20% holding in the REIT and appears can still manage
the underlying assets.
About the author: Matthew Schmidt is a
Senior Analyst at B&I Capital Ltd based in
Singapore. He has been with B&I Capital since
2010 covering Asia x Japan REIT markets and
in Asia since 1999.
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