New REIT rules to spur investment in retail and affordable housing

CBRE RESEARCH
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On March 24, 2023, the National Development and Reform Commission (NDRC) and China Securities Regulatory Commission (CSRC) unveiled new policies related to China’s public REIT pilot programme.

Key elements of the new policies include:

Expanding REITs’ underlying asset types to include retail properties such as shopping malls and department stores;
Lowering the threshold of asset valuation from RMB 1 billion to RMB 800 million for IPOs of affordable rental housing1 REITs, and;
Reducing the minimum dividend yield requirement for three years after listing from 4.0% to 3.8% p.a.

What does it mean for commercial real estate?

Anti-pandemic measures including lockdowns weighed heavily on retail property investment in China in 2022, with the sector accounting for just 4.5% of total en-bloc commercial real estate investment volume, a record low2. Capital values for shopping malls in tier I cities have fallen by 15-20% since 2019, while cap rates have moved out by more than 50 bps to above 4.5%.

Since China shifted away from its zero-covid policy at the end of last year, there has been a strong improvement in retail market sentiment. Respondents to CBRE’s 2023 Asia Pacific Retail Flash Survey identified Chinese tier I cities as the preferred locations for cross-border expansion. Combined with sold expansionary demand from local retailers, CBRE expects leasing demand and rental growth to accelerate this year.

With the leasing market now turning, and the new measures announced last week allowing retail assets to be included in REITs, investors are advised to re-evaluate their view towards this asset class. CBRE advises existing owners of retail properties to evaluate their options by either disposing of their assets on the private market or via a potential IPO.  

The lowering of the projected 3-year dividend yield requirement for public REIT listings could help strengthen asset pricing expectations for pre-REIT investors. Cap rates for Grade A office and retail properties in tier I cities are generally valued in a range of 4.5% to 5%, while those for industrial and logistics properties are generally above 5%. With the cost of finance in China currently standing at 4.3% (5-year LPR), most commercial real estate assets still offer positive carry. As CBRE expects rents to display growth across all property classes in 2023, investors are advised to re-evaluate their underwriting assumptions as prime assets in tier I cities are set to register higher total returns.

The lowering of the threshold of asset valuation for IPOs of affordable housing REITS will accelerate investment in the sector. While the valuation of underlying asset portfolios of the four listed affordable rental housing REIT each stood above RMB 1 billion as of March 2023, the valuation of individual assets held by these REITs generally sat at between RMB 300 – 600 million. CBRE believes that lowering the valuation threshold of affordable rental housing REITs will facilitate new REIT listings and spur investment in small-and-medium sized projects and properties in lower tier markets with cheaper unit prices.

Note1: Affordable rental housing is provided primarily to low-to-medium income urban residents or members of younger generations who find it hard to afford to rent an apartment on the open market. An affordable rental housing project is usually required to offer units for rent at a certain discount from the market rental rate with a cap on annual rental increases. The project also enjoys government incentives such as lower value-added tax and property tax.
Note2: Retail property investment accounted for an average of 13% of China’s total en-bloc commercial real estate investment volume in the years between 2018 and 2021.

Conclusion and recommendations

China’s REIT market was launched in June 2021, with five property-backed public C-REITs raising around RMB 15 billion. As of March 2023, there were a total of 15 property REITs in China with a total raised capital of RMB 30 billion. The first few REITs were mostly infrastructure and industrial focused, with coverage later expanding to include affordable rental housing, and now retail. Major fund managers and developers such as GLP, DNE, JD Property and CR Land have all leveraged C-REITs as an exit route.

CBRE expects the new REIT measures announced last week to encourage investors to lower their underwriting risk when it comes to exit routes. As the Chinese government continues to pursue its goal of creating a consumer and innovation led economy, investors should re-evaluate their positions in asset classes set to benefit from the so-called “new economy”.

Contacts
Henry Chin, PhD
Global Head of Investor Thought Leadership
Head of Research, Asia Pacific
henry.chin@cbre.com.hk

Sam Xie
Head of Research, China
sam.xie@cbre.com.cn


CBRE

CBRE RESEARCH

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