On April 30, 2020, the China Securities Regulatory Commission and the National Development and Reform Commission jointly issued the “Notice on Promoting the Relevant Work of Real Estate Investment Trust Funds (REITs) in the Infrastructure Sector” (hereinafter referred to as the “Notice”), and officially launched the foundation The pilot work of publicly-funded REITs in the field of facilities.
The “Notice” provides a comprehensive explanation of the significance of the pilot projects of infrastructure REITs, and detailed deployment of specific work. The release of the “Notice” is a milestone event in the construction of China’s REITs market. The public placement of REITs pilots is of great significance to the reform of China’s real estate investment and financing system, and its importance can be comparable to the significance of the registration system pilots for the reform of the A-share market.
The public offering REITs market construction is an important starting point for China ’s financial supply-side reform. Since 2007, the academic, policy and practical communities have conducted in-depth research on the functional positioning, operation mode, product design, and regulatory rules of the Chinese REITs market, and have also made many attempts. The current legal framework, regulatory environment, and market preparation The conditions are basically mature, and it is feasible to conduct a public placement REITs pilot.
Recently, the impact of the new crown epidemic on macroeconomic growth, small and medium-sized enterprises, and employment cannot be underestimated. In order to cope with the negative impact of the epidemic, it is necessary to launch targeted economic policy. We have done in-depth research and analysis. Among the 42 economies with REITs system in the world, most of them launched REITs during the economic downturn, economic crisis, and lack of economic growth momentum. Its purpose is to stimulate economic vitality and provide power for economic development. . In the short term, in order to cope with the impact of the epidemic and economic downward pressure, the REITs market can revitalize the stock assets and support the economic restart; in the long run, the construction of the REITs market will become a problem-solving solution to many structural problems in China’s real estate investment and financing system, which can effectively fill The product gaps in the Chinese asset management market have broadened the investment channels for social capital to meet the investment needs of residents’ wealth management, pension, and social security funds, promote high-quality economic development, and help China’s economic transformation and upgrading. Therefore, it is the right time to launch the pilot of REITs at this time!
According to the deployment of the “Notice”, China will take the lead in promoting the pilot of publicly-raised REITs in the field of infrastructure. Infrastructure and holding real estate are two types of basic assets of REITs. Judging from the development experience of global REITs, the REITs market for these two types of assets is operating well and developing maturely. REITs were first concentrated in the field of held real estate, and are now widely used in infrastructure areas such as wireless communication facilities, ports, toll roads, power facilities, logistics warehouses, and data centers. As of 201On June 30, 2009, a total of 220 REITs were listed in the United States, with a total market value of US $ 1.27 trillion. Among them, the number of products invested in infrastructure accounted for 22%, and the market value accounted for 31%; Singapore issued 8 Infrastructure REITs, with a market value of about 8 billion US dollars; India has also developed an independent infrastructure REITs rule system, and has launched 4 infrastructure REITs with a market value of 3.6 billion US dollars for transportation and energy projects.
It should be said that no matter which field starts the pilot, it is theoretically feasible. There are two main reasons for starting the pilot work in the field of infrastructure.
First, reforms in the area of infrastructure investment and financing are particularly urgent. REITs can revitalize a large amount of stock assets, help prevent local debt risks, reduce leverage, provide capital for new projects, stabilize investment and compensate for shortcomings, and help attract social capital to participate in infrastructure projects through marketization. Use the open and transparent pricing mechanism of the capital market to promote the high-quality development of infrastructure construction.
Second, for China ’s practice, the lowest cost and most effective policy pilot method should be selected, and other relevant national policies (eg, real estate policies) should also be considered Coordination and coordination. Piloting in the field of infrastructure can reduce the complexity of the pilot work. Starting from the field of infrastructure is a safe and reasonable choice after extensive research and in-depth research, extensively listening to the opinions of all parties, in accordance with the current laws and regulations framework and with reference to overseas mature market experience.
The “Notice” details the pilot scheme for public infrastructure REITs.
The “Notice” details the pilot scheme for public infrastructure REITs.
First of all, the pilot program reflects the key development direction of China ’s publicly funded REITs . China’s publicly-funded REITs will follow the basic characteristics of global standardized REITs, adhere to the equity-oriented approach through public issuance and public transactions, and realize REITs penetrating holding real estate rights and interests. Among them, the specific rules of income structure requirements, dividend ratio, leverage ratio and governance structure refer Establishing mature market rules and promoting implementation in a direction that helps reduce the leverage ratio of the main body, revitalize existing assets, and improve the real estate asset pricing mechanism.
Secondly, the “Notice” clarifies the product model of the public placement REITs pilot. That is, qualified securities companies or fund management companies that set up public fund management qualifications will set up closed-end public funds and raise funds through public offering Funds, and through the purchaseInfrastructure asset-backed securities (ABS) complete the acquisition of the underlying infrastructure assets. This model is called “public fund + ABS” model in the market. The choice of listing carrier is an important issue for the launch of publicly-funded REITs. REITs are divided into corporate and contractual models according to organizational structure. In China, corporate REITs face strict restrictions on the issuance and listing of stocks in the Securities Law, and the current provisions of the Company Law on company establishment, share transfer and profit distribution are not compatible with the operation of REITs. The “public fund + ABS” model fully utilizes the existing institutional framework and is operable. Public funds investing in ABS securities effectively avoid the possible legal disputes that public funds invest in the equity or real estate of unlisted companies, and at the same time use the mature mechanism and model of enterprise ABS to make reasonable valuations and reduce transaction costs. This model uses public funds as a carrier to achieve public fundraising and public listing, in order to lower the real estate investment threshold, making it possible for the general public investors to allocate real estate assets, and provide high-quality large-scale assets for residents to increase property income.
Third, the “Notice” determines the basic principles for advancing the work of infrastructure REITs . The “Notice” indicates that the basic principles of promoting infrastructure REITs are: conforming to national policies, focusing on high-quality assets, adhering to market-oriented principles, adhering to rights and interests orientation, conducting pilot work steadily, and promoting long-term healthy development. Among them, adhering to the principle of marketization is the core of ensuring the long-term healthy development of China’s REITs market. The ultimate goal of China’s REITs market is to build an open, transparent and effective market, protect the interests of both investment and financing parties, and create value for both investment and financing parties.
Fourth, the “Notice” lists the requirements for infrastructure REITs pilot projects. The specific requirements include three aspects, that is, focus on key areas (priority support for the Beijing-Tianjin-Hebei, Yangtze River Economic Belt, Xiong’an New District, Guangdong, Hong Kong, Macao and the Greater Bay Area, Hainan, the Yangtze River Delta and other key areas, support national-level new areas and qualified national-level economic and technological development zones to carry out pilots); focus on key industries (prioritize support for infrastructure supplementary shortcomings, including warehousing logistics, charging Transportation facilities such as highways, municipal engineering such as water, electricity and heat, pollution treatment projects such as urban sewage and garbage treatment, solid waste and hazardous waste treatment. Encourage new infrastructure such as information networks, as well as national strategic emerging industrial clusters, high-tech industrial parks, and special industries Pilots in the park, etc.), and focus on quality projects. The “Notice” emphasizes “quality” projects. The core of the so-called high-quality projects lies in clear ownership, market-oriented business model, sustained and stable cash flow, and sponsors and operating companies with sustainable operating capabilities. Under the principle of marketization, high-quality projects should eventually be approved by investors.
Secondly, the “Notice” clarifies the product model of the public placement REITs pilot. That is, qualified securities companies or fund management companies that set up public fund management qualifications will set up closed-end public funds and raise funds through public offering Funds, and through the purchaseInfrastructure asset-backed securities (ABS) complete the acquisition of the underlying infrastructure assets. This model is called “public fund + ABS” model in the market. The choice of listing carrier is an important issue for the launch of publicly-funded REITs. REITs are divided into corporate and contractual models according to organizational structure. In China, corporate REITs face strict restrictions on the issuance and listing of stocks in the Securities Law, and the current provisions of the Company Law on company establishment, share transfer and profit distribution are not compatible with the operation of REITs. The “public fund + ABS” model fully utilizes the existing institutional framework and is operable. Public funds investing in ABS securities effectively avoid the possible legal disputes that public funds invest in the equity or real estate of unlisted companies, and at the same time use the mature mechanism and model of enterprise ABS to make reasonable valuations and reduce transaction costs. This model uses public funds as a carrier to achieve public fundraising and public listing, in order to lower the real estate investment threshold, making it possible for the general public investors to allocate real estate assets, and provide high-quality large-scale assets for residents to increase property income.
Third, the “Notice” determines the basic principles for advancing the work of infrastructure REITs . The “Notice” indicates that the basic principles of promoting infrastructure REITs are: conforming to national policies, focusing on high-quality assets, adhering to market-oriented principles, adhering to rights and interests orientation, conducting pilot work steadily, and promoting long-term healthy development. Among them, adhering to the principle of marketization is the core of ensuring the long-term healthy development of China’s REITs market. The ultimate goal of China’s REITs market is to build an open, transparent and effective market, protect the interests of both investment and financing parties, and create value for both investment and financing parties.
Fourth, the “Notice” lists the requirements for infrastructure REITs pilot projects. The specific requirements include three aspects, that is, focus on key areas (priority support for the Beijing-Tianjin-Hebei, Yangtze River Economic Belt, Xiong’an New District, Guangdong, Hong Kong, Macao and the Greater Bay Area, Hainan, the Yangtze River Delta and other key areas, support national-level new areas and qualified national-level economic and technological development zones to carry out pilots); focus on key industries (prioritize support for infrastructure supplementary shortcomings, including warehousing logistics, charging Transportation facilities such as highways, municipal engineering such as water, electricity and heat, pollution treatment projects such as urban sewage and garbage treatment, solid waste and hazardous waste treatment. Encourage new infrastructure such as information networks, as well as national strategic emerging industrial clusters, high-tech industrial parks, and special industries Pilots in the park, etc.), and focus on quality projects. The “Notice” emphasizes “quality” projects. The core of the so-called high-quality projects lies in clear ownership, market-oriented business model, sustained and stable cash flow, and sponsors and operating companies with sustainable operating capabilities. Under the principle of marketization, high-quality projects should eventually be approved by investors.
The setting of the pilot project requirements has two important starting points: one is to create a good start for the long-term healthy development of REITs, and the other is to serve the national development strategy. Since 2017, the central government has successively determined major strategies such as the Xiong’an New Area, Hainan Free Trade Pilot Area, Guangdong-Hong Kong-Macao Greater Bay Area, and the Yangtze River Delta Regional Integration, which clearly requires vigorous implementation of a number of major infrastructure projects to accelerate the construction of a modern infrastructure system To explore more flexible policy systems in financial innovation and other aspects. To further improve the quality and level of infrastructure construction, we must gradually get rid of the traditional logic of relying on various types of leveraged financing to support investment. The implementation of the development and construction concept should rely on a multi-level, market-based investment and financing system. As the “anchor” of real estate asset pricing, REITs are essential for improving the investment efficiency of real estate investment and optimizing resource allocation.
It should be noted that the new infrastructure investment has the characteristics of large scale and long payback period, and the technology research and development and application business models are uncertain. The construction of new infrastructure should not rely too much on credit financing, but should focus on the use of equity financing tools to achieve a true multi-level market-based investment and financing system. There are many real-estate assets in the new infrastructure, such as 5G towers, data centers, and so on. Regarding the initial investment of new infrastructure projects, no matter what exit method is adopted, the new round of capital supply should come from the market, forming a virtuous cycle of investment and financing chain. REITs can become the last link in the new infrastructure investment chain, helping to form a circular and sustainable investment and financing ecosystem.
Since March 2019, the National Development and Reform Commission, China Securities Regulatory Commission, Shanghai Stock Exchange, Shenzhen Stock Exchange, Guanghua School of Management, Peking University, China International Engineering Consulting Company, etc. The Xiong’an New Area, Hainan Free Trade Pilot Area, Guangdong-Hong Kong-Macao Greater Bay Area, and the Yangtze River Delta region have conducted cross-regional, cross-sectoral, and cross-sectoral special investigations on the use of REITs to revitalize infrastructure stock assets. Opinions from local governments, enterprises, financial institutions, scientific research institutes, etc .; field surveys and dozens of Chinese and foreign enterprises. The investigation provided strong support for the planning of infrastructure REITs pilots. At the same time, in the whole process, various departments have formed an effective cooperation mechanism. With the smooth progress of the pilot work, on the basis of the pilot, after continuously accumulating experience and improving system rules, the construction of the REITs market should gradually be promoted to other fields.
(Author Zhang Zheng is a professor at Guanghua School of Management, Peking University)