Inclusion of malls in China’s REITs programme to boost developers: Moody’s
Chinese developers will benefit from the new funding avenue provided by the spin-off of their shopping centres through real estate investment trusts or REITs, Moody’s said. The spin-off of shopping centres that are run by Chinese developers will offer an alternative source for these builders to raise money from capital markets and manage their leverage, the international ratings agency said.
Applications to list REITs by three property firms — China Resources Land (CR Land), China Jinmao Holdings and SCPG Holdings — that involve more than RMB10.9 billion ($2.06 billion) were accepted by the Chinese authorities on Oct 26, less than a week after Beijing added “consumption-related infrastructure projects” such as shopping centres and department stores to its REITs programme.
“[REITs allow] new funding to be raised at competitive costs, from which property developers with abundant commercial assets will benefit,” said Cedric Lai, an analyst at Moody’s.
Although more time is needed for the property sector and capital markets to test the programme, which is at a preliminary stage, it could help developers in controlling or reducing their debt to some extent as the programme grows, Lai said.
For instance, Moody’s expects that CR Land’s leverage will improve slightly after the spin-off of its shopping centres, with its pro forma debt-to-capitalisation ratio in 2023 falling to 43% from 43.1%, and its pro forma cash levels rising to RMB121 billion from
RMB117 billion over the same period.
CR Land aims to raise RMB6.9 billion through a REIT with estimated net proceeds of RMB4.9 billion, while SCPG — a unit of China Vanke, China’s second-largest developer by sales — intends to raise around RMB4 billion with estimated net proceeds of RMB3.6 billion. Jinmao has not disclosed its fundraising target but plans a 34% subscription.
Their applications are subject to further approvals from the China Securities Regulatory Commission and the stock exchanges in Shanghai and Shenzhen.
REITs — investment vehicles that derive a regular and stable stream of income from underlying assets — were introduced in China in April 2020 with limited coverage of eligible asset types. They mainly focused on large-scale infrastructure developments such as toll roads, industrial estates and logistical warehouses.
Chinese regulators in March vowed to expand this pilot programme to cover commercial infrastructure such as shopping centres, which was seen as an opportunity by some big Chinese developers to switch their business models.
REITs are as important to the business of real estate as mortgage loans are to housing development, Yu Liang, China Vanke’s chairman, said during a media briefing on Oct 20. They will help Chinese developers change their roles from home builders to real estate operators and service providers, he said.
As of Oct 31, 29 REIT products had gone public in China, with 20 listed in Shanghai and nine in Shenzhen, according to the two stock exchanges.