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Industrials
China is known for vigorous infrastructure build-out. C-REITs could turn these assets (US$60trn) into a key investment class for domestic and global investors.
A new investment asset class, backed by ample assets and demand for yields
The first nine China REITs (C-REITs; all infrastructure assets) were issued in H121, marking the start of a new asset class. China has US$60trn of infrastructure assets, with an increasing number generating positive cash flow. If 2% of these are securitised via REITs, using our proprietary interactive model we estimate a US$1.2trn C-REIT market in 2030E (5% of stock market), with 4-8% annualised unlevered returns and low volatility. Global investors can access C-REITs through the Qualified Foreign Institutional Investor (QFII) programme, but we believe their access may be broadened as China continues to open its financial markets. Our upside scenario assumes a C-REIT market of US$3trn in 2030E (11% of stock market), making it the largest globally.
Our 2030E base case suggests US$1.2trn of C-REITs, but upside to US$3trn
Our bottom-up analysis adopts a cash flow-based approach through forecasting EV/sales multiples and REIT potential of sectors including toll roads, logistics property, utilities, industrial parks. Our upside scenario assumes more favourable policy (e.g., tax) and lower required returns by investors; it also includes property REITs (restricted from C-REITs now). In this scenario, a US$3trn C-REIT market in 2030E would make China the largest REIT market globally and imply significant opportunities for professional fees and incremental infrastructure fixed asset investment (FAI). The latter is even important amid rising concerns on property development.
Is there enough demand for C-REITs
We believe there is. In our view, C-REITs are attractive to domestic investors (especially insurance firms) given their extended returns, generous dividend pay-out and attractive dividend yields. We view banks as the most noteworthy potential investors of C-REITs, if the capital charge becomes more favourable. Global investors generally like REITs for access to real estate returns in a well-managed, efficient vehicle. Thus, we believe their participation in C-REITs could be significant if investing restrictions are eased.