Revitalizing Infrastructure Assets And Broadening Equity Financing Channels

Real estate investment trusts (REITs) pilot projects in the field of infrastructure have been rapidly promoted.

On May 17, China's first batch of 9 infrastructure public offering REITs projects were officially approved and officially entered the fund's public offering stage. As of May 20, the inquiry announcement, fund contract, prospectus, custody agreement and summary of fund product information of all 9 public offering REITs have been released and officially entered the roadshow inquiry period.

According to reports, the first batch of project funds are basically invested in infrastructure projects, which are mainly used in key areas such as scientific and technological innovation, green development and people's livelihood. Some people close to the regulator said that infrastructure REITs are for ordinary investors to issue income certificates to raise funds, invest in and hold infrastructure assets with sustained and stable income, which are operated by professional institutions and convert infrastructure assets into highly liquid listed financial products through fund listing and trading, Its essence is the issuance and listing of mature infrastructure projects.

The first batch of products is on the way

On April 30, 2020, the China Securities Regulatory Commission and the national development and Reform Commission jointly issued the notice on promoting the pilot work of real estate investment trust funds (REITs) in the field of infrastructure, marking the official launch of the Chinese version of public offering REITs for infrastructure.

One year after the preparation, the first batch of infrastructure public offering REITs will be issued soon.

According to public information, the first batch of 9 public raised REITs projects include 2 expressway projects, 3 industrial park projects, 2 warehousing and logistics projects and 2 green projects. The valuation scale of the above nine projects is about 31.5 billion yuan, which are distributed in Beijing, Shanghai, Guangdong, Jiangsu, Zhejiang and other key regions. The original equity holders cover central enterprises, local state-owned enterprises and foreign-funded enterprises in some key infrastructure fields. The overall cash flow distribution rate of the projects is about 4% to 12%.

According to the above close regulators, the first batch of public REITs projects are in line with major national strategies, macro-control policies and industrial policies, and are highly exemplary and representative. The relevant REITs governance mechanism not only strengthens the main responsibility of the manager, but also takes into account the enthusiasm of the original equity holders, consolidates the main responsibility of the fund manager, and introduces the original equity holders to participate in the internal management decision-making or consultation. All the 9 projects are operated and managed by the original stakeholders, focusing on giving full play to the professional operation ability of the original stakeholders.

In order to regulate the related party transactions and horizontal competition, the supervision also draws lessons from the regulatory experience of listed companies, public funds and overseas mature markets, requiring the original equity holders to improve the decision-making mechanism of related party transactions, improve the management system of horizontal competition, and maintain the independence of operation and management institutions, so as to protect the legitimate rights and interests of investors.

In the view of industry insiders, the emergence of public funded infrastructure REITs is also of great significance for the high-quality development of China's economy.

Some experts in the industry said that REITs can revitalize the infrastructure stock assets. At present, it provides new channels for preventing and resolving the debt risk of local governments. China's governments at all levels and related enterprises spend a large proportion of investment, and have accumulated large-scale high-quality infrastructure assets. REITs can revitalize these existing assets, provide sources of incremental investment funds, and reduce leverage ratio, which is conducive to preventing and resolving local government debt risks and promoting high-quality economic development.

REITs also provides new equity financing channels for the infrastructure sector. In recent years, the price to book ratio of Listed Companies in transportation, municipal and other infrastructure industries is relatively low, the stock price is generally lower than the net assets, and the P / B ratio of some overseas listed enterprises is even lower than 0.3 times. The equity financing resistance of related enterprises is relatively large, which is also one of the reasons for the rising leverage ratio. REITs can provide equity financing mode suitable for infrastructure field, and improve asset valuation level and equity financing ability.

In addition, REITs is more helpful to attract long-term capital to participate in the capital market. In overseas mature markets, REITs is a large category of mature financial products parallel to stocks and bonds. It has the characteristics of medium income, medium risk and stable dividend, which can better match the investment preference of pension and insurance funds. The launch of REITs is conducive to filling the gap of domestic financial products and attracting all kinds of social funds, especially long-term funds.

According to Wu Yaping, director of the institutional Policy Research Office of the Investment Institute of the national development and Reform Commission, China's existing infrastructure assets are about 380 trillion yuan, of which 30% - 40% belong to infrastructure assets with operating income. According to the proportion of 35% of the median value, the stock infrastructure assets of operating income is about 120 trillion yuan. Roughly estimated, if 2% - 5% of them are converted into REITs, the scale will be about 3 trillion to 6 trillion yuan.

The relevant person in charge of the Shanghai Stock Exchange also believes that the potential scale of China's infrastructure REITs market is about trillion yuan. From the perspective of project reserve, PPP projects in the library alone can directly provide about 400 billion yuan of alternative bid for REITs. Up to now, there are more than 20 projects in the first batch of pilot project library and reserve project library of Shanghai Stock Exchange.

However, Liu Lu, chief analyst of Ping An Securities fixed income, also pointed out that from the perspective of asset supply, domestic high-quality cash flow infrastructure projects are scarce, and PPP, special debt, infrastructure REITs and other products are facing the challenge of finding high-quality assets. On the other hand, domestic public funds also lack the management experience of underlying assets, and long duration risk management has become an important factor for investors.

Cultivating diversified institutional investors

According to the reporter of 21st century economic report, after the approval of the first batch of public REITs projects, regulatory authorities are also focusing on cultivating diversified REITs institutional investors. We will promote the optimization of institutional arrangements for investment in REITs, encourage institutional investors such as banks, insurance, social security funds, pension funds, securities and funds to participate, and actively cultivate a professional and diversified group of institutional investors.

In this regard, the relevant person in charge of Shenzhen Stock Exchange pointed out that REITs, as an innovative financial product in addition to traditional financial instruments such as stocks and bonds, is conducive to enriching investment and financing tools in the capital market. REITs has the characteristics of stable income, medium risk and medium income, so as to better meet the investment needs of institutional investors such as insurance funds, pension funds, social security funds, bank financing and so on. The public offering and subscription threshold of REITs products is low and managed by professional institutions, which can guide more social capital to allocate to real estate assets with high quality and stable cash flow.

Relevant persons in charge of CICC, who participated in the first batch of public REITs, also pointed out that the REITs products also have stable expected distribution and high distribution rate. Their income mainly comes from the rents and charges of infrastructure assets, and has set a mandatory distribution rate of no less than 90% every year. For REITs products whose underlying assets are real estate, the transaction price of fund shares returns to the intrinsic value of assets in the long-term change, so that investors have the opportunity to obtain the income of asset appreciation. At the same time, REITs products also have the characteristics of high transparency and standard operation.

"The original intention of public REITs product design is to provide stable income distribution and pursue asset appreciation by investing and holding mature infrastructure assets." The relevant person in charge of CICC said.

The person in charge said that with the change of macro environment, such as the arrival of an aging society, the return on assets has been declining for a long time, the demand for asset management industry is undergoing deep changes, and the demand for alternative investment has increased significantly. As a securitization product of long-term income assets, REITs can meet the long-term investment needs of pension, insurance, social security fund and enterprise annuity, It provides a new asset allocation tool for bank financing subsidiaries and other professional investment institutions, and opens up new channels for residents to increase their property income.