Finding Out The "Pioneers" In The Trillions Of Public Reits Market

The first batch of real estate investment trusts (REITs) in the field of infrastructure in China have successively released inquiry results.

As of May 27, China's first batch of nine public offering REITs have all announced the "offering announcement" and disclosed the inquiry results, with a total amount of raised capital of 31.403 billion yuan.

According to the offering schedule, after the offline investors' subscription is successfully completed, the public investors' subscription for the relevant products will be launched on May 31.

According to the published data, various institutional investors, such as self operated securities companies, public funds, private equity funds, bank financing subsidiaries, insurance, trust and other institutional investors have maintained a high degree of attention to public offering REITs.

The average effective subscription times of all products were more than 7 times, and Shekou Industrial Park project ranked first with the overall subscription multiple of 15.31 times after excluding the invalid quotation.

"The subscription enthusiasm of the institutions is higher than expected, and the quality of the first batch of (public REITs) projects is good. Retail investors may not have a high degree of participation because they don't understand." Some agency salesmen told the reporter of the 21st century economic report.

According to the relevant person in charge of Shanghai Stock Exchange, the potential scale of China's infrastructure REITs market is already around trillion yuan.

From the perspective of project reserve, PPP projects in the library alone can directly provide about 400 billion yuan of alternative bid for REITs.

However, after the successful issuance of the first nine public REITs funds, efforts are still needed to broaden the 1 trillion level market. To ensure the quality of follow-up infrastructure projects and the stability of cash flow, improve the management experience of public funds on the underlying assets, and solve the current situation of double taxation involved in REITs are the problems that the market will pay more attention to.

High quality infrastructure projects are relatively scarce

On the whole, the first batch of project funds are basically invested in infrastructure projects, mainly used in key areas such as scientific and technological innovation, green development and people's livelihood.

Infrastructure REITs is for ordinary investors to issue income certificates to raise funds, invest and hold infrastructure assets with sustained and stable income. It is operated by professional institutions and converted into listed financial products with strong liquidity through fund listing and trading. Its essence is the issuance and listing of mature infrastructure projects.

In the view of relevant persons in charge of CICC, with the change of macro environment, such as the arrival of an aging society, the rate of return on assets has been declining for a long time, the demand for asset management industry is undergoing deep-seated changes, and the demand for alternative investment has increased significantly. As the securitization products of long-term income assets, REITs is particularly suitable for the investment of long-term funds such as pension, insurance, social security fund, enterprise annuity, etc., which provides a new tool for asset allocation for bank financing subsidiaries and other professional investment institutions, and opens up new channels for residents to increase their property income.

"In the first batch of 9 REITs funds, the expected cash distribution rate of property REITs in the next two years will be 4% - 5%, and that of operating rights REITs will be 6% - 12%. On the whole, the quality of the first batch of REITs funds listed on the market is good. If there is no special accident, the rate of return can be realized. " For the quality of the first batch of public REITs, some people in the industry have affirmed it.

Although the quality of the first batch of public REITs is excellent, high-quality cash flow infrastructure projects are still scarce from the perspective of asset supply. Whether the quality of subsequent REITs projects can be maintained remains to be seen.

Liu Lu, chief analyst of fixed income of Ping An Securities, pointed out that all the current "open door" financing methods in the field of infrastructure construction, including special bonds, PPP and urban investment bonds, emphasize the coverage of the project income and cash flow on the debt principal and interest. In recent years, it is not uncommon for special debt and PPP to compete for projects, "indicating that mature projects with considerable cash flow have always been scarce".

According to the data, in 2020, China's new local special debt will reach 375 million yuan, an increase of 74% year-on-year. However, the cumulative growth rate of infrastructure investment in 2020 is only 3.41%.

"The large-scale issuance of special bonds in 2020 has not driven the growth rate of infrastructure construction at the same time. One possible reason is the lack of high-quality projects. Local governments and financial institutions do not dare to blindly launch projects with mismatched cash flow, which may lead to the hidden danger of long-term debt." Liu Lu believes that REITs is only a product form, and the more important thing is the robustness and return rate of cash flow of underlying assets. For infrastructure projects with low rates of return on fees or rents, their market attractiveness and acceptability are likely to be low.

In addition, the original equity holders may have doubts about their willingness to make statements for high-quality projects with stable cash flow.

At present, according to the accounting standards for Business Enterprises No. 33 - consolidated financial statements, the original equity holders need to judge whether the control over infrastructure projects and related entities is retained. If the control is not retained, the infrastructure projects originally held and included in the consolidation need to be "derecognized", that is, "statement" and recognize relevant profits and losses.

However, the original equity holders of public infrastructure REITs are often local state-owned enterprises, central enterprises or urban investment platforms. Infrastructure projects with stable cash flow could have been used as high-quality mortgage assets for multiple financing methods of equity and creditor's rights such as bank loans and bond financing, and could improve the company's valuation and image.

In Liu Lu's view, if the original equity holders transfer the control right of infrastructure projects through public offering infrastructure REITs, it often involves the statement of their related assets, which may lead to the reduction of their asset scale and even affect their subsequent refinancing ability. Therefore, the willingness of the original equity holders to make statements in the future may be in doubt.

The problem of double taxation needs to be solved

In addition to the concern about the quality uncertainty of the follow-up projects, in the view of the insiders, the double taxation of domestic public REITs is the core problem to be solved.

According to reports, the "public offering fund + infrastructure ABS" mode adopted by infrastructure public offering REITs is neither creditor's rights REITs nor equity based REITs. However, due to its structural characteristics, it contains both creditor's rights attribute and equity attribute. This also leads to the public offering REITs products not only to follow the relevant rules of public offering REITs, but also to refer to the relevant rules of existing bonds, equity, fund law, fund operation and management measures and other relevant rules of public funds and ABS. Therefore, there is an obvious problem of double taxation.

Some law firm partners engaged in securitization business introduced to the 21st century economic news reporter that at present, the emergence and development of overseas international REITs are accompanied by the establishment of special legislation and the amendment and improvement of relevant laws such as tax law. However, under the legal framework of the existing securities law and the securities investment fund law, China has formed the REITs with the structure of "public funds + ABS", and has not set up special legislation or amended the tax law and other relevant laws.

"In the early stage of asset restructuring of infrastructure public offering REITs, according to different restructuring schemes, it may involve the collection of VAT, land value-added tax, stamp tax, corporate income tax, deed tax and so on. Moreover, the policy of value added tax is not clear, which may lead to higher tax burden. " The partners of the above-mentioned law firm said that during the establishment and existence of infrastructure public offering REITs, fund products, fund share holders and fund managers should also be taxed, involving more taxes.

In addition, during the withdrawal period of public REITs, the transfer of public fund shares by investors in the secondary market will constitute the taxable situation of capital gains, and the disposal of assets or equity of the project company by REITs will also constitute the taxable situation of property transfer, which requires separate taxation and involves multiple taxes.

As an example, asset management personnel of head securities companies said that during the existence and operation of REITs, the project company, as the actual business entity, should pay enterprise income tax according to law. However, the operating income of the project company should be distributed to investors through the "ABS + fund" two-tier structure, involving value-added tax, personal or corporate income tax.

"The upper and lower levels should clarify the principle of tax neutrality, that is, neither increase the additional tax burden for investors, nor cause obvious losses to the national tax because of the conversion into REITs structure." According to the asset management personnel of the securities firm, from the perspective of international cases, companies or products that generally adopt REITs structure will have corresponding preferential tax policies at the project company level under certain conditions.

"In the design of REITs' tax arrangements, the principle of" tax neutrality "should become a consensus. In principle, it will not bring new tax burden due to the design and operation of REITs' transaction structure." The relevant person in charge of CICC suggested that the tax penetration mechanism should be further improved in the future, and some tax incentives should be given from the perspective of encouraging the development of REITs. Combined with the practice of REITs project, there are still some tax problems to be further discussed and solved.

Public offering REITs management organizations meet new challenges

In fact, the special asset structure of public offering REITs also puts forward higher requirements for the public fund industry.

"The essential difference between REITs funds and general public funds is that they invest in the underlying assets. Instead, they are more like public utility stocks with low volatility and high dividends." For example, Zhang Nan, a senior researcher at the Institute of financial research, said that ordinary public offering funds mainly invest in various standardized securities assets, such as stocks, bonds, and bulk commodities, which are standardized products traded in the securities market. They can be directly priced according to the raised funds and shares, and the number of shares to be issued is determined by the raised funds, In daily investment, fund managers only need to make the decision of buying and selling through research.

The biggest difference between REITs funds and general public funds is that the underlying assets are non standardized assets. Its investment in industrial parks, warehousing and logistics and toll road projects, there is no asset transaction price for reference. Therefore, when issuing REITs funds, in addition to the development and sale of the public, it also refers to the IPO for strategic investors and inquiry for offline investors. In this product, fund managers also need to participate in the actual operation of underlying assets, which is quite different from the traditional public fund managers.

"Mutual fund managers have always been good at secondary market investment and lack of experience in the underlying asset management of the primary market. For example, the duration of the first batch of 9 publicly offered REITs is more than 20 years, and the longest duration of Ping An Guanghe Expressway REIT is even more than 99 years. This super long duration of underlying asset management is a challenge for public funds. " There is Beijing area public offering fund related person in charge said.

In the view of the public fund, the income of public REITs depends on the operation of infrastructure projects to a large extent, and the infrastructure projects are easily affected by economic environment changes and other factors, resulting in the actual cash flow lower than expected, and other income fluctuations such as rents and charges will also affect the stability of the income distribution level of the fund. It remains to be seen whether the fund managers can have methods or mechanisms to mitigate the corresponding risks.

In fact, in addition to public funds, the rest of the agencies involved in public REITs projects are also facing new challenges. Before that, CICC fund, as the head of securities institutions of the first batch of REITs securities managers, specially established the innovation and investment department, introduced industry personnel, specially launched public REITs business, and laid out its long-term development in the field of public offering REITs.

According to the relevant person in charge of galaxy securities proprietary investment headquarters, the product structure of public offering REITs is more complex than that of previous investment varieties. In the process of IPO and operation management, it involves fund holders, public fund managers, asset support special plans, SPV and project companies, among which the public fund manager coordinates multi-layer subjects and is in the core position.

Among them, whether the public funds are equipped with sufficient relevant industry operation and management experience team, effectively integrate the existing operation ability of the original equity holders, and design an effective management incentive mechanism determine whether the underlying assets can be operated well and bring stable and growing distributable cash flow to investors.

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