New Elements of Public REITs

The rise of public Real Estate Investment Trusts (REITs) in the Chinese market has captivated both local and foreign investors, particularly as the variety of REITs continues to expand and firms actively seek to raise their capitalThrough this exploration, we can uncover the current state and potential future of the A-share REIT market, characterized by fluctuating stock prices, shifting investor perceptions, and varying performance across asset classes.

As of mid-2023, a total of 28 public REITs have been listed on the A-share marketFollowing the initial wave of regulation-driven price surges, a subsequent reevaluation has emerged as the market faces substantial pricing correctionsThe drastic fluctuations experienced in the first half of 2023 reflect the heightened volatility of the REIT sector, initially viewed through the lens of governmental policy incentives, but quickly tempering under economic realitiesWhile preliminary operating data has led to minor recoveries for some funds, the majority have seen their stock prices retreat toward levels closer to their issue pricing.

Among the 28 publicly traded REITs, a diversification of assets is noticeableA breakdown indicates there are 16 real estate-focused REITs, comprising 4 dedicated to affordable rental housing, 9 to industrial parks, and 3 focused on logistics storage solutionsComplementing these, there are also 7 toll road REITs and 5 environmentally friendly or green concept REITs, which include 2 focused on waste and wastewater treatment and 3 on renewable energy generationWhen aggregated, the total market capitalization of these REITs reaches approximately 83 billion yuan, with real estate making up about 38%, toll roads 40%, and environmental green concepts 22%.

Examining the sizes of these funds reveals critical insights into their operational frameworks

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Toll road REITs typically represent the largest individual scales, with net assets ranging from 2 to 10 billion yuan and an average of 6.05 billion yuanOf these, five are engaged in external borrowing, with the highest loan amount reaching 1.3 billion yuanAnnually, these funds generate revenues between 200 million to 1.2 billion yuan, averaging around 600 million yuanHowever, compared to toll road REITs, the real estate counterparts generally report lower scales, with net assets between 1 and 6 billion yuan.

The affordable rental housing REITs, post-initial public offerings, generally possess smaller leased spaces of 100,000 to 200,000 square meters, with net asset values around 1.2 to 1.3 billionThese REITs' revenue typically doesn't exceed 90 million, while the cash available for distribution ranges between 50 to 60 millionIn contrast, the industrial park REITs usually list renewable spaces of 100,000 to 400,000 square meters, net assets ranging from 800 million to 3.5 billion yuan, with annual revenues escalating to about 130 million on average, while the cash for distribution averages from 30 million to 160 million.

The logistic storage REITs trend slightly higher in average size, with properties from 300,000 to 700,000 square meters and net assets between 1 and 6 billion yuanAnnually, earnings hover from 100 to 400 million yuan, suggesting a steady revenue lineEnvironmental or green projects exhibit significant variance; with approaches differing across various sectors, waste treatment-focused REITs typically record lower net assets between 1 and 2 billion yuan with revenues from 250 million to 450 millionIn contrast, renewable energy generation projects boast larger net assets, ranging from 3 to 8 billion yuan with substantial annual income streams from 400 million to 2.3 billion yuan.

It's clear that currently, toll road REITs and energy generation funds dominate in terms of asset sizes, while real estate-focused REITs display potential for growth

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As evidenced by ongoing initiatives, two logistic storage and two industrial park REITs are already undergoing expansions relative to their original offerings, which range from 20% to 100% of their initial issuance sizes.

Turning to profitability, a focus on the Earnings Before Interest, Tax, Depreciation, and Amortization (EBITDA) margin is essential for comprehensionNotably, toll road REITs demonstrate robust EBITDA margins of 78% to 86% with an average of 82.5%. By contrast, the real estate counterparts see average margins around 70%, with affordable housing REITs averaging around 75%. Interestingly, green projects reveal differentiated results, wherein solar power REITs can yield margins up to 88%, while various waste treatment and gas generation projects hover between 30% and 35%.

Growth trajectories vary greatly across REIT categoriesThe toll road segment exhibited sluggishness through 2022, attributed to the pandemic, but has since seen revitalized performance in early 2023; observing an growth in annualized cash distributions amidst slight increases in revenuesConversely, real estate REITs, particularly those in affordable rentals, struggle under pressures to retain occupancy and revenue levels, and show declines in earnings across most the first quarter of 2023.

Conducting a valuation comparison across these funds, the average expected payout ratio as of 2023 shows a slight overall uptrend, stabilizing at approximately 6.9%. This marks a recovery from previous months amid adjustments to stock pricingDetailed evaluations reveal that real estate REITs present the lowest payout ratios compared to their toll road and renewable energy counterparts, consistently reflecting values in the range 4% to 4.5% especially in its affordable housing division.

As this sector evolves, the initial enthusiasm post-regulatory changes led to considerable price inflations, tempered by the ongoing readjustments