Colliers International Research: Public REITs Issuances Reach Record High, Driving Real Estate Companies to Accelerate Transformation.

Since 2024, under the push of favorable policies, China's public offering REITs have entered a new stage of normalized development. Data from CRIC shows that as of December 31, 2024, 29 public offering REITs have been listed, raising a total of 65.517 billion yuan, setting a new high in recent years. With the gradual improvement of the policy environment for public offering REITs and the gradual expansion of the market size, real estate development companies holding high-quality existing assets have also seen more opportunities. Some real estate enterprises have begun to explore public offering REITs. According to CRIC statistics, in 2024, 6 real estate enterprises issued public offering REITs, with consumer infrastructure and rental housing as the main directions. REITs are a very important part of bridging the "investment, financing, management, and exit" loop. Real estate operators with high-quality real estate projects can use public offering REITs to accelerate the strategic transformation of their enterprises, shifting their asset operation model from heavy to light, and transforming their role from developers to asset management service providers, which is of great significance to real estate enterprises in overcoming industry challenges. REITs have long been mature abroad, but in China, their true application has only been around for about four years. Since the joint release of the "Notice on Promoting the Pilot Work of Real Estate Investment Trust Funds (REITs) in the Infrastructure Sector" by the China Securities Regulatory Commission and the National Development and Reform Commission on April 30, 2020, the pilot work of public offering REITs in China has officially started. After multiple expansions, in 2024, China's public offering REITs entered a new stage of normalized development, moving towards standardization and maturity. On July 26, the National Development and Reform Commission issued the "Notice on Fully Promoting the Normal Issuance of Real Estate Investment Trust Funds (REITs) Projects in the Infrastructure Sector" (Document No. 1014), deploying the promotion of the normalization of REITs issuance. With the continuous enhancement of policy support, the good profitability and dividend payout ratio of listed public offering REITs are also important driving forces for the continued development of public offering REITs. According to CRIC monitoring data, of the 36 public offering REITs listed before mid-2024, 33 achieved profits in the first three quarters, with 19 of them achieving a net profit margin of over 20%, accounting for more than half. The long-term stable and relatively high returns of public offering REITs, combined with favorable policy support, have led to increasing attention from original equity owners and investors. As of December 31, 2024, 29 public offering REITs have been listed, raising a total of 65.517 billion yuan, setting a new high in recent years. The total market size of listed public offering REITs in China has also reached 166.164 billion yuan. 1. Six real estate enterprises have issued public offering REITs, with consumer infrastructure and rental housing as the main directions With the gradual improvement of the policy environment for public offering REITs and the gradual expansion of the market size, real estate development companies holding high-quality existing assets have also seen more opportunities, and some real estate enterprises have begun to explore public offering REITs. As of December 31, 2024, a total of 8 REITs products from CHINA RES LAND, China Merchants Shekou Industrial Zone Holdings, Grandjoy Holdings Group, Vanke, Shou... (Unfortunately, the text was too long for me to translate within a single response. If you want the full translation, please let me know.)Among the first batch of listed infrastructure REITs for consumer spending, the largest issuance scale reached 6.902 billion.According to the project prospectus, the underlying assets of Huaxia CRC Commercial REIT are the Qingdao MixC, with the project company being CHINA RES LAND (Shandong) Co., Ltd. owned 100% by CR Vanguard Assets Holding Limited, a subsidiary of China Resources Land. This means that the financials of the project company originally needed to be consolidated with China Resources Land. However, in the mid-2024 performance report, China Resources Land has sold all of its equity in CHINA RES LAND (Shandong) Co., Ltd. to Huaxia CRC Commercial Trust Public Fund for 6.126 billion yuan. After the sale, China Resources Land subscribed for 30% of the fund shares for 2.071 billion yuan and was classified as an associated company. After the transaction, China Resources Land no longer exercises control and does not consolidate the accounts. In the case of China Resources Land, the issuance of public REITs essentially shifts the underlying assets from consolidated to off-balance sheet. In the transition from consolidated to off-balance sheet status, real estate companies will transfer their project company's equity to public funds. In the consolidated financial statements, the difference between the consideration for the transfer of equity (and the fair value of the remaining equity) and the carrying value of long-term equity investments (fair value of identifiable net assets calculated continuously from the purchase date * ownership ratio) is recognized as investment income. Additionally, after losing control, China Resources Land classifies the project company as an associated company and subsequently accounts for it under the equity method. 2. Vanke China Jininli Consumption REIT eases off-balance sheet funding pressure On April 30, 2024, China Jininli Consumption Infrastructure REIT under Vanke was officially listed on the Shenzhen Stock Exchange, with an issuance size of 3.26 billion yuan. The original equity holder of China Jininli Consumption Infrastructure REIT is Inli Commercial Property Co., Ltd., and the project company is Hangzhou Runheng Property Co., Ltd. Previously, Inli Commercial Property and Hangzhou Runheng were affiliated companies of the Vanke Group and were originally in off-balance sheet status. However, after the issuance of public REITs, although Vanke's shareholding in the project company has decreased, it still maintains significant influence over the project company. According to the interim report for the first half of 2024, Inli Commercial Property and Hangzhou Runheng are still listed as associated companies in the related party relationships. In the case of China Jininli Consumption REIT, it remains in off-balance sheet status. The impact of issuing public REITs can be seen from the decrease in the investment amount in current period recognized in long-term equity investments in associated companies. Additionally, the difference between the consideration for the transfer and the carrying value of the long-term equity investment disposed of is recognized as investment income. 3. Public REITs enhance the independence of the commercial sector and help companies transform and upgrade Overall, the issuance of public REITs is not simply a matter of selling assets directly but requires companies to retain a portion of the equity in the project and ensure operational stability. Although the use of funds has been relaxed in Document No. 1014, with the upper limit of the proportion of funds to supplement the flow of original equity holders' capital raised to 15%, there are still relatively strict restrictions. In this context, the significance of issuing public REITs is more to enhance the independence of the commercial sector under the pressure of capital at the parent company. The commercial sector can raise funds through the market and achieve self-sufficiency and independent development. For real estate companies like China Resources Land that have a large number of high-quality commercial projects, they should seize the policy opportunity of public REITs to build a new development pattern. In the context of deep industry adjustments, these real estate companies can accelerate the transformation to light asset models through the issuance of public REITs, further enhancing their capital strength. At the same time, issuing public REITs can help activate the low-return stock assets of real estate companies, and the funds raised can be reinvested in related assets, reducing the cost of sedimentation in stock assets. Finally, public REITs help real estate companies continue to expand their presence in non-residential areas, incubate potential commercial projects, improve the return on commercial projects, and achieve asset appreciation. For real estate companies facing liquidity constraints, the issuance of public REITs can be used as an auxiliary means of financing, but it will not be the primary method. For these companies, the priority is to address the debt pressure, and the optimal solution remains to sell various heavy assets directly, including but not limited to equity in associated or joint venture companies, investment properties, and so on. In fact, public REITs also serve as a bridge, linking real estate companies with investment institutions, and may lead to more potential cooperation opportunities in the future. Taking Vanke as an example, according to public information, the subscribers of China Jininli Consumption REIT include institutions such as China Life Insurance, CITIC Securities, Founder Trust, Ping An Wealth Management, and CMB Wealth Management; In August, Vanke also established a Consumer Pre-REIT Fund with CITIC and Taikang. Such links and collaborations with financial institutions will better drive companies to complete transformation and upgrade and get out of the industry cycle faster. Overall, real estate companies participating in the application for public REITs are mainly in the areas of consumer infrastructure, rental housing, and industrial parks. With the gradual improvement of the public REITs policy environment and the gradual expansion of the market size, real estate development companies with high-quality existing assets have more opportunities, and more real estate companies are starting to explore. For real estate companies with a large number of high-quality commercial projects, they should seize the policy opportunities of public REITs to build a new development pattern. However, for real estate companies facing liquidity constraints, the optimal solution is still to sell various heavy assets directly to address debt pressure. This article is sourced from the WeChat public account "Ding Zuyu Evaluates the Real Estate Market", edited by GMTEight: Chen Yufeng.