The double whammy of China’s deepening real estate crisis and stock market slump has taken its toll on real estate investment trusts.
No more. The CSI index, which is made up of 28 trusts, has fallen 31% this year, trailing the benchmark CSI300 index by 18 percentage points. All but three publicly traded REITs are trading below their opening prices, according to data compiled by Bloomberg.
The hardest-hit examples include the Fulgor Capital Water Closed-End Infrastructure Fund, linked to a sewage treatment project in eastern Anhui province, which has fallen on all but one day in the past month. . CCB Principal Zhongguancun Industrial Zone Closed-End Infrastructure Fund, which leases land in Beijing, has fallen nearly 50% this year.
REITs with Chinese characteristics: what does it mean for investors?
REITs with Chinese characteristics: what does it mean for investors?
“The performance of REITs depends on the fundamentals of the relevant sectors, and fundamentals are mainly related to macroeconomics,” said Fu Lichun, co-founder of Beijing Yuntai Capital. “Stock prices have fallen to lows as stock market conditions worsen. The fact that they are a fairly new asset class does not make them immune to declines.”
China is experimenting with using REITs to tap into the world’s second-largest stock market to finance local government-funded projects. The attractiveness of payments based on annual income from operating projects and the potential for profits on the stock market attracted retail investors in the early months of its launch.
Expansion of China’s REIT system to facilitate financing in commercial real estate market
Expansion of China’s REIT system to facilitate financing in commercial real estate market
If successful, it would be a win-win for both private investors and local governments, giving them affordable access to China’s mega-infrastructure projects while reducing the latter’s debt burden.
But an unprecedented downturn in the real estate market, weak rental demand due to the economic downturn, and relentless decline in stock prices have made REITs a losing bet. About half of the trusts are tied to the performance of the real estate market, as they lease land, office space or apartments. The remainder will be invested primarily in infrastructure such as roads and environmental facilities.
In September, the Zhongguancun Fund warned of a downturn in Beijing’s office rental space, with vacancy rates expected to rise and prices fall amid the economic slowdown. Hua’an Zhangjiangguang Grand Park Closed-End Infrastructure Fund announced in October that one of its major tenants had abandoned its lease and the occupancy rate of one of its properties was 39 percent lower than a year ago.
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Despite the sharp fall in stock prices, the policy push for the asset class continues. Draft guidelines published earlier this month allow national pension funds to include such trusts in their portfolios. And while the poor performance has heightened risk awareness, some analysts believe the poor performance has made the trade more profitable.
REIT valuations are becoming more attractive, revealing wide variation in exposure to cyclical effects across trusts, analysts at CITIC Securities, including Ming Ming, said last month. This is stated in the outlook note. “We see bargain-hunting opportunities in the short term and recommend affordable housing, energy and conservation trusts.”