Once-Hot China REITs Get Slammed As Property Slump Dents Demand

(Bloomberg) -- A double whammy of China’s deepening property crisis and a stock market slump has claimed a victim — real estate investment trusts. 

REITs debuted on the country’s stock market in 2021 with much fanfare, hailed as a way to channel retail investor money into large-sized infrastructure and property projects. The idea initially caught on, making them one of the hottest investments amid the government’s infrastructure push and relatively scarce offerings. 

Not any more. A CSI gauge of 28 trusts has lost 31% this year, underperforming the benchmark CSI 300 Index by 18 percentage points. All but three of the listed REITs are trading below their debut prices, according to data compiled by Bloomberg. 

Some of the hardest hit include Fullgoal Capital Water Close-end Infrastructure Fund — linked to a waste-water treatment project in eastern Anhui province — which has fallen in all but one day over the past month. The CCB Principal Zhongguancun Industrial Zone Close-end Infrastructure Fund, which leases land in Beijing, has dropped nearly 50% this year.

“The performance of REITs depends on the fundamentals of their related sectors, which are largely tied to the macro economy,” said Fu Lichun, co-founder of Beijing Yuntai Capital Co. “Their prices have gravitated to lows amid poor stock market sentiment. The fact that they are a fairly new asset class doesn’t make them exempt from downturns.” 

China has been experimenting with REITs to tap the world’s second-largest equity market to finance projects that would’ve otherwise been funded by local governments. The allure of payouts on annual income from operational projects, and potential stock market gains, had attracted retail investors in the early months of their launch. 

If successful, they would’ve been a win-win for both individual investors and regional governments by giving the former an affordable access to China’s gigantic infrastructure projects, while lessening the debt burden for the latter. 

Yet an unprecedented downturn in the property market, weak rental demand amid a sluggish economy, and a relentless slide in equity prices have made REITs a losing bet. About half of the trusts are tied to property market performance as they lease land, office space or apartments. The rest invest mostly in infrastructure like roads and environmental facilities.  

In September, the Zhongguancun Fund warned of sluggishness in Beijing’s office rental space amid a slowing economy, anticipating higher vacancy rates and falling prices. The HuaAn Zhangjiang Everbright Park Close-end Infrastructure Fund in October stated that one of its key tenants has surrendered its lease, leading to a drop of 39 percentage points in occupancy rate for one of its properties from a year ago.  

Policy push for the asset class has continued despite the plunge in shares. A draft guideline issued earlier this month allows the national pension fund to incorporate such trusts into portfolios. And while the poor performance has raised awareness of the risks, some analysts believe that the slide has made them a better deal. 

REITs valuations have become attractive, and it has become apparent that there is a wide disparity between different trusts in their exposure to cyclical impact, Citic Securities Co. analysts including Ming Ming wrote last month in a 2024 outlook note. “We see opportunities to bargain hunt in the short term, and recommend affordable housing, energy and environment protection trusts.” 

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