Real estate investment trusts (REITs) have become a popular method for investors to participate in the real estate market. While most U.S. investors are familiar with the 221 REITs in this country, which are estimated to have $3.5 trillion worth of assets under management in 12 sectors of commercial and residential real estate, REITs can be found across the globe in countries and regions like Hong Kong, Singapore, Australia, and many more. But there's about to be a new country to the block as China formally announces its plans to enter the market. Here's what U.S. REIT investors need to know.
Not your everyday REIT
In mid-May, 2021, the China Securities Regulatory Commission (CSRC) shared its first round of approvals of China's public REITs. These nine REITs, who have been authorized to raise $30 billion Yuan ($4.7 billion), will own and invest in real estate directly related to China's infrastructure systems, including the improvement, management, and development of industrial parks and warehouses, roadways, sewage systems, airports, and garbage facilities, among other infrastructure projects.
Unlike U.S. REITs, China's REITs will be managed and traded through a mutual fund that then invests in asset-backed securities that indirectly hold the infrastructure projects. The REITs are expected to be available for investment on multiple Chinese stock exchanges as soon as fall of 2021.
The hope in utilizing this unique asset focus is to reduce the debt burden from local governments, transitioning securitization from the public to the private market while hopefully propelling economic growth. The question at hand now is whether or not this structure will work.
U.S. REITs are backed by income-producing properties, with a clear revenue stream for the company and viable return for participating investors. But China's REITs are backed by infrastructure projects, which may or may not have viable revenue streams to drive long-term returns to investors.
Will this impact U.S. investors?
There is discussion that the REIT market could eventually encompass residential and commercial real estate, similar to how REITs operate in the U.S. today, which eventually could unlock over $3 trillion of real estate according to Goldman Sachs, but that is still a long way off. Right now, China joining the REIT game doesn't have much of an impact on U.S. investors as it's not in direct competition with our REIT structure or that of any other country. However, the unique structure of China's REITs could be something for investors to look out for. If successful, this model could be adapted here in the United States and become a lucrative new way to invest while also improving infrastructure projects.