China is close to launching nine infrastructure REITs to finance national infrastructure projects (eg, industrial parks, warehouses, tollways, sewage plants) for the first time, with an estimated market capitalisation of US$4.7b by May 2021. These nine China REITs (C-REITs) are allowed to be sold and traded on both the Shanghai Stock Exchange (five REIT equities) and Shenzhen Stock Exchange (four) by the green light of the China Securities Regulatory Commission (CSRC).
According to EPRA and CIA reports, the size of China’s commercial real estate market was over US$4.5tn in 2020, with strong population demographics (1.4b), urbanisation (62.5%), GDP growth (6.1%), high consumption and solid real estate market fundamentals. Hence, the size of a broader C-REIT market was estimated to reach over US$3tn by Goldman Sachs, being approximately 2.5 times larger than US-REITs (US$1.2tn in 2020) and the world’s largest.
These have seen a positive market outlook of the C-REIT market, albeit with several challenges, such as legal and tax issues. Going forward, more C-REIT equities are expected to be released in the future. The next question is “How can China learn from global REIT sub-sector market trends?” Specialised real estate is a better investment strategy, the core of my doctoral thesis and recent journal publications (links are available below).
Dominant role of sector-specific REITs globally
Sector-specific REITs have played a prominent role across the Americas (the percentage of sector-specific REITs to composite REITs was 93%), Asia-Pacific (78%) and Europe (72%) (see Figure 1). As the largest regional REIT market, the Americas (US$1,061.60b) highly concentrated on the specialty sector (eg, infrastructure, data centres, healthcare, hotel; 34% of the size of American REITs) in 2018, followed by retail (19%), residential (18%), office (12%) and industrial sectors (9%). Simultaneously, the Asia-Pacific had a strong preference for retail (29% of the size of Asia-Pacific REITs), office (21%) and industrial sectors (14%). It is noteworthy that Asia-Pacific had a higher ratio of the industrial sector to composite REITs by market capitalisation than other regional REIT markets.
Figure 2 portrays the dynamics of Asia-Pacific REIT sub-sectors between July 2006 and December 2018. The most rapid growth in market capitalisation was in the specialty sector, with an 8.8 times increase since 2006. It was trailed by residential (4.7), industrial (3.2), office (2.5), diversified (2.3) and retail sectors (2.2). As a proportion of the market, however, the retail sector has averagely contributed 34.1% of the size of Asia-Pacific REITs over the past 12 years, followed by office (21.7%), industrial (12.8%), residential (5.3%) and specialty sectors (4.3%).