Three questions to help you understand infrastructure REITs

Introduction to this book: ? Introduces the cutting-edge theory and international experience of REITs, and explains in detail the key elements and practical operating procedures for implementing REITs projects in China’s macro-environment. It is a systematic and pragmatic book on REITs. Product Operation Manual.

About the author: Lin Hua, Chartered Financial Analyst, American Certified Public Accountant, and Certified Risk Manager. He is currently the president of the China Asset Securitization Research Institute, an expert invited by the National Development and Reform Commission and the Ministry of Finance for PPP targeted treasury, and an expert consultant of the Asset Securitization Business Professional Committee of the Asset Management Association of China. He is the author of books such as "The New Pattern of Finance: Breakthroughs and Innovations in Asset Securitization", "China Asset Securitization Operation Manual", "PPP and Asset Securitization", etc.

On April 24, 2020, the China Securities Regulatory Commission and the National Development and Reform Commission jointly issued the "Notice on Promoting the Pilot Work of Real Estate Investment Trust Funds (REITs) in the Infrastructure Sector" (China Securities Regulatory Commission [2020] 40 No.), on April 30, the China Securities Regulatory Commission publicly solicited opinions on the "Guidelines for the Public Offering of Infrastructure Securities Investment Funds (Trial)" (Draft for Comment).

Based on the above two regulations, combined with this book, I will share with you three key questions: 1. What are REITs; 2. Why did my country introduce infrastructure REITs; 3. The classification of infrastructure REITs. This will help you quickly understand the purpose and significance of the country's promotion of infrastructure REITs.

1. What are R EI Ts

REITs (Real Estate Investment Trusts): Real means "real" in Chinese; Estate means "real estate" and "real estate rights" in Chinese ;Investment means "investment" in Chinese; Trusts means "trust" in Chinese.

REITs are real estate investment trust funds: they refer to the public collection of funds from a specific majority of investors through the issuance of benefit certificates, handing over to specialized investment institutions for investment management, and allocating comprehensive investment income to investors in proportion. A financial investment product for investors.

What are infrastructure REITs?

Before introducing this concept, it is necessary to introduce the concept of "asset securitization business".

Asset securitization business refers to the activity of issuing asset-backed securities based on the cash flow generated by underlying assets as repayment support, credit enhancement through structuring and other methods.

What is an underlying asset?

Basic assets refer to property rights or properties that comply with laws and regulations, have clear ownership, can generate independent and predictable cash flows, and can be specified. The underlying asset can be a single property right or property, or a combination of multiple property rights or properties.

What do the underlying assets include?

Including corporate receivables, lease claims, credit assets, trust benefits and other property rights. Infrastructure, commercial properties and other real estate or real estate income rights, as well as other properties or property rights recognized by the China Securities Regulatory Commission.

The above definition is quoted from the "Regulations on the Management of Asset Securitization Business of Subsidiaries of Securities Companies and Fund Management Companies" (China Securities Regulatory Commission Announcement [2014] No. 49).

The so-called infrastructure REITs: refer to the special infrastructure asset support plan issued in accordance with the Securities Regulatory Commission Announcement [2014] No. 49. Infrastructure includes transportation facilities such as warehousing and logistics, toll roads, airports and ports, municipal facilities such as water, electricity and heating, and other infrastructure such as industrial parks, excluding residential and commercial real estate.

This definition is quoted from the "Guidelines for Publicly Offered Infrastructure Securities Investment Funds (Trial)" (Draft for Comment).

2. Why did my country introduce infrastructure REITs?

Cemetery REITs, or real estate investment trust funds, have been launched in the United States in the 1960s. More than 40 countries (regions) have issued such products, and their investment areas have expanded from the original real estate to Hotel warehousing, industrial real estate, infrastructure, etc. have become mature financial products specializing in real estate investment.

Currently, there are no true cemetery REITs in my country. In order to effectively revitalize the existing infrastructure assets, enhance the quality and efficiency of the capital market in serving the real economy, and enrich the capital market investment and financing tools, infrastructure REITs were introduced.

How did infrastructure REITs develop in the United States?

The Great Depression of 1929 led to a sharp decline in the U.S. and global economies. In order to revive the economy, President Roosevelt signed the National Industrial Recovery Act in 1933. One of its important contents was the government’s public *** Investment in engineering. In the 1950s, President Eisenhower introduced private capital in the infrastructure field, which not only brought the total public investment as a share of GDP to a historical high of 7%, but the federal government debt continued to decline.

After the 2008 financial crisis, President Obama promulgated the "American Recovery and Reinvestment Act of 2009", which proposed investing in infrastructure to stimulate economic growth.

The same is true for the “long-term infrastructure investment plan” proposed by President Trump.

As of November 2016, there were 167 public REITs in the National Real Estate Investment Association's Equity REITs Comprehensive Index, including 5 infrastructure REITs, with a total market value of US$76.4 billion, accounting for 15% of the total market value of all public REITs. 8.35%.

What should individual investors pay attention to when investing in REITs? (Refer to the news interpretation of "Si Toushe")

This kind of fund is different from the investment direction of public funds that we usually understand.

For example, if you usually buy a public fund, the investment direction may be: stocks/bonds/currency funds, and the investment scope is relatively narrow.

When you invest in infrastructure REITs, essentially, you don’t have to invest directly in infrastructure. As long as you buy REITs, it is equivalent to getting one thousandth or ten thousandth of a certain project in the infrastructure. One share is used to invest in infrastructure.

If you want to enter the field of infrastructure investment, you must have considerable financial strength. This ReiTs tool is equivalent to lowering the investment threshold for infrastructure.

But you must be clear that infrastructure REITs are real estate after excluding commercial real estate and residential properties.

In essence, infrastructure REITs lower the investment threshold in this field, thus guiding more funds into this field, reflecting a policy orientation. For example: logistics industry/toll roads/water, electricity and heating, etc.

If you buy REITs, it is similar to holding one ten thousandth or one thousandth of the equity of a certain logistics project, the equity of a certain toll company, or the equity of a certain water, electricity and heating company. .

What are the specific rights and interests?

Tolls on toll roads are used as dividends, and cash flow from warehousing and logistics is used as dividends.

What is the specific rate of return?

About 5%, it is impossible to reach double digits.

What are the investment risks?

Mainly the risk of retracement. For example, the extreme Hong Kong ReiTs suffered three consecutive kills: the first kill was the turbulence of the market itself, that is, the tourism industry has caused great damage to local real estate rental income. The second kill is the entire contagion of the epidemic. The three kills are a global decline and a period of depression and recession.

3. Types of infrastructure REITs

Based on asset composition and the source of investment income, infrastructure REITs can be divided into equity, mortgage and hybrid types. In practice, different forms of REITs play different roles. Similar to commercial property REITs, infrastructure REITs can have diversified underlying assets and investment forms.

Infrastructure REITs rarely adopt mortgage loan models similar to commercial properties because they involve the transfer of underlying assets. Mature infrastructure assets that have entered a stable operation period are more suitable for the development of equity REITs.

However, during the construction period, since it is difficult for infrastructure REITs to form leasehold properties and there is almost no project income, it is more suitable to use mortgage REITs to issue development loans and obtain interest income.

When talking about infrastructure REITs, we cannot fail to talk about PPP.

What is the PPP model?

It is Public-Private Partnership, that is, the cooperation between the government and social capital, which is a project operation model in public infrastructure.

Infrastructure REITs and PPPs promote and complement each other.

On the one hand, the PPP model provides infrastructure REITs with a large number of high-quality basic assets; on the other hand, infrastructure REITs provide a feasible exit channel for early investors in PPP projects.

Since the return of capital and the exit mechanism are important considerations for whether social capital is involved in PPP projects, the introduction of infrastructure REITs, combined with preferential tax policies, will significantly change the current issue of social capital investment in PPP projects.

Based on the characteristics of organizational form and transaction structure, infrastructure REITs can be divided into three categories: corporate, contractual and partnership REITs.

Corporate REITs refer to joint-stock investment companies with the purpose of profit that are formed by investors with different investment philosophies to invest in specific objects in accordance with the law. The company raises funds by issuing shares and is an economic entity with independent legal personality, similar to a joint stock company.

Contractual REITs refer to investment trust funds established by issuing beneficiary certificates when investors sign a trust contract with an investment company or REITs manager, who in turn signs a trust contract with the REITs custodian.

REITs managers are the promoters of REITs. They raise funds to form trust assets by issuing beneficiary certificates and invest according to the trust contract; the REITs custodian keeps the trust assets according to the trust contract and specifically handles securities, cash Management and related agency business are generally performed by banks.

In countries and regions such as Australia, Canada, Malaysia, Singapore, Hong Kong, and Taiwan, the typical structure of REITs is contractual.

Partnership REITs are composed of limited partners (LP) and general partners (GP). The limited partners (LP) invest in REITs and share the income of REITs, but do not participate in the affairs of REITs. Management, and has limited liability for REITs only based on the amount of its investment. The general partner (GP) manages the affairs of REITs and bears unlimited joint and several liability for REITs.

The following figure shows the main differences between corporate, contractual and partnership REITs.

Based on the characteristics of fund raising and circulation, infrastructure REITs can be divided into two categories: public placement and private placement.

Publicly offered REITs refer to REITs that raise trust funds from public investors through public offerings. The number of investors is generally not limited, and the minimum investment amount of each investor is generally not limited. Publicly offered REITs are the mainstream form of real estate financial investment products in the international capital market and are as highly liquid as stocks.

Private placement REITs refer to REITs that raise funds from specific investors in a non-public manner. REITs promoters directly promote REITs units and raise REITs funds to some institutional investors or people with sufficient funds through phone calls, letters, interviews, etc.

Private equity REITs have higher risk tolerance requirements for investors and are relatively loosely regulated. In the United States, its market share is less than 5%. In China, the special product form of "special plan + PreREITs" has begun to appear in 2013. It is a debt financing tool and is currently developing rapidly.

?The following figure shows the main differences between public and private REITs.

Today I would like to share with you three key questions: 1. What are REITs; 2. Why did my country introduce infrastructure REITs; 3. The classification of infrastructure REITs. I hope you can quickly understand the purpose and significance of the country's implementation of infrastructure REITs.