1. April 2020 saw a pilot project for infrastructure public real estate investment trust (REIT) projects officially launched by the China Securities Regulatory Commission (CSRC) and the National Development and Reform Commission. Please can you provide some background and colour to the reasons for this significant move by Chinese authorities?
China Infrastructure Real Estate Investment Trusts (hereinafter referred to as “C-REITs”) are another beneficial exploration of financial supply-side structural reform since the pilot registration-based IPO of the Science and Technology Innovation Board and ChiNext. After several rounds of large-scale infrastructure construction, China currently has a huge amount of infrastructure assets. Such illiquid assets restrict reinvestment and cause huge financial pressure on the government. C-REITs aim to revitalize the huge amount of infrastructure assets and strengthen the ability of the capital market to serve the real economy. We believe that C-REITs are the key to realizing the dual circulation development model. In the future, C-REITs are expected to become an effective tool for local public investment, and the C-REITs market is expected to become an internationally leading REITs market with large scale, variety, low risk, and strong liquidity.
2. One of the intentions for these vehicles is to fund projects local governments would otherwise have to finance. What changes and development can we expect to see in the real world in the coming years given the REITs which have already been registered, apart from the financial moves of these funds?
In addition to revitalizing existing assets and opening up a new channel for infrastructure project financing, from the perspective of REITs’ development, C-REITs are expected to cover more types of real estate (including other potential infrastructures and commercial real estate) in the future, and many different types of new C-REITs products will be derived. C-REITs will eventually become an indispensable part of China’s capital market. From the perspective of the capital market, C-REITs are expected to reverse the situation that investors are keen on financial assets rather than real assets, and then reduce the overall leverage ratio of the whole society, thereby reducing the risks caused by irrational investment. From the perspective of investors, C-REITs provide a new option for personal investment, which supports infrastructure investment while increasing residents’ property income. It is expected to become an important measure to expand domestic demand, open internal circulation, and enhance the ability of the capital market to serve the real economy.
3. Early 2020 was a significant time globally given the onset of a pandemic. What challenges or opportunities do you believe this uncertain climate has provided to this pilot project?
In terms of challenges, due to the COVID-19 epidemic the data collection and due diligence work of the project was adversely affected to some extent. However, the current unstable situation caused by the epidemic has also created opportunities for the development of C-REITs. In 2020, the capital market was severely affected by the pandemic, resulting in lower valuations of company stocks. Since most of the income of C-REITs comes from fixed income such as rent and service fees, they can effectively resist the adverse effects caused by uncertain factors such as the pandemic and inflation. All C-REITs products have been sought after by Chinese investors since their issuance. Up to now, the market value of Fullgoal Capital Water REIT has risen by more than 50%, which is the best-performing REITs product in the first pilot program.
4. East & Concord was involved in the issuance of the Fullgoal Capital Water Closed-end Infrastructure Securities Investment Fund, one of the first 5 REITs approved for registration under this pilot program. Please can you provide some detail as to the projects this REIT will be linked to?
The underlying assets of Fullgoal Capital Water REIT are four sewage treatment projects in Shenzhen and Hefei held by Beijing Capital Eco-Environmental Protection Group Co., Ltd.
For details, please refer to the prospectus published by Fullgoal Capital Water REIT.
5. Working on a novel project such as this must have had its challenges. Can you provide us some insight as to what went into bringing this issuance to successful fruition?
First, we have accurately grasped the development trends of policies and regulations of C-REITs. As the first batch of lawyers engaged in C-REITs in China, we have deeply participated in the legislative work of the National Development and Reform Commission, the China Securities Regulatory Commission, Shanghai and Shenzhen stock exchanges, and other relevant institutions on C-REITs, which has provided great assistance to our work.
Second, we give full play to our long-term experience in related business fields. The lawyer service team of Fullgoal Capital Water REIT is one of the few lawyer teams in China that are deeply involved in the fields of infrastructure, project financing, and construction engineering with broad practical experience in Quasi-REITs issuance. Based on such experience, we can provide enterprises with full-process and all-round project investment and financing legal services. The long-term experience in related business fields has become the magic weapon for this successful issuance.
6. As a lawyer working on a REIT’s project in 2022, what are some key considerations and points to keep in mind?
In 2022, China’s economic development is likely to encounter greater downward pressure and face a more complex situation due to the global pandemic, weakening trade growth, lack of consumer demand, and other factors. In this context, more and more immature projects are expected to be packaged and listed through C-REITs to obtain financing. As C-REITs lawyers, we should focus more on the compliance of the underlying assets, especially in projects that may cause hidden government debt, and prevent C-REITs’ original owners from putting assets with non-compliance risks into the C-REITs.
7. Looking forward, what developments do you see happening/hope to see in the REITs arena in China and the wider Asian region?
We hope that with the joint efforts of relevant government departments and other institutions, the C-REITs market will become a world mainstream REITs market with the trading value of more than RMB 100 trillion yuan and a variety of estate assets. At present, China’s economic situation and the RMB exchange rate remain relatively stable under the dual influence of the Russian-Ukrainian war and the pandemic so that capital in Asia and the rest of the world has a positive attitude towards China’s capital market. The further development of C-REITs can benefit both the economic environment and the dual circulation development strategy, at the same time, it can attract more foreign investment and enhance the international status of China’s capital market.
Authors:
Jennifer Zhang
jenniferzhang@east-concord.com
Jennifer Zhang has rich experience in serving financial institutions, corporate governance, structured funds, and mergers and acquisitions of listed companies, covering, but not limited to, real estates, Fin Tech, internet finance, healthcare, and military industries.
Songjun Zhai
Songjun Zhai is a legal expert at the China Public Private Partnerships Center of the Ministry of Finance and is a professional in the field of finance and infrastructure construction.
East & Concord Partners
Jennifer Zhang
Dorothy Xing
Lei Zhang
Chaoyi Ji
