On June 21, 2021, the introduction of the first nine publicly offered Real Estate Investment Trusts (REITs) marked a significant milestone in China's ongoing financial reformsThis venture was not just any ordinary financial initiative, but one that carried the lofty aim of optimizing resource allocation while supporting real economic growthThe public REITs sector burgeoned from an initial zero listings to an impressive roster of 27 products, all within a span of just two yearsAmidst a backdrop of asset scarcity, it became evident that almost every issuance attracted massive attention and funding, sometimes amounting to hundreds of billions.

From its inception, the publicly offered REITs entered the market with a halo effect, promising vast developmental potential amounting to trillionsHowever, after two years of fluctuating fortunes, one cannot help but ponder: what kind of report card has this new financial entity produced?

The transition from explosive growth to market volatility vividly illustrates the journey of these REITs in the secondary market

Data from Wind shows that as of June 21, the average increase in the first nine publicly offered REITs since their launch was 9.6%, with eight of the nine products presenting positive yieldsThe only exception was the "Ping An Guangzhou Traffic Guanghe Expressway REIT," which faced a staggering drop of 20.19%. Conversely, the "Huaxin Zhangjiang Guangda Yuan REIT" and "AVIC Shougang Biomass REIT" recorded phenomenal performances, with gains surpassing 20%.

In the wake of these initial offerings, financial companies wasted no time in exploiting this "blue ocean" opportunityTo date, a total of 27 products have entered the market, amassing a combined scale of approximately 90.9 billion yuanThe underlying asset categories have also broadened from merely industrial parks and expressways to new energy resources, affordable rental housing, and basic consumption infrastructureThe ecosystem seems to be enriching itself rapidly.

Additions to this ever-expanding cohort are still rolling out

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The "CICC Hubei KTO Guanggu Industrial Park REIT" successfully completed its issuance on June 9, pulling in 1.575 billion yuan, with its listing date yet to be announcedFurthermore, another publicly offered REIT linked to CICC awaits approvals for its issuanceAdditionally, two other financial firms have submitted applications for their own publicly offered REIT products in June.

According to the official website of the China Securities Regulatory Commission, on June 8, ICBC Credit Suisse Asset Management submitted procedures for its first publicly offered REIT, associated with the Hebei Highway GroupFollowing suit, Yuanta Fund, the leader of this sector, made headlines on June 14 by filing its first public REIT project after a two-year hiatus, focusing on the Guangzhou Economic and Technological Development Zone.

Despite the increasing number of products, the performance in the secondary market appeared shaky

As of June 21, all 27 listed public REITs faced losses this year, with declines ranging from 1.43% to a staggering 26.72%. Notably, the Huaxia China Communications Construction High-Speed REIT and the Jianxin Zhongguancun Industrial Park REIT both suffered declines exceeding 20%.

Analyzing the fluctuation in market prices, a report by CICC Securities suggested that significant disagreements about valuation persist in the secondary marketThe relatively small market size at this stage translates to limited liquidity, resulting in a high sensitivity to even slight investment activitiesCollected market behaviors can thus have ripple effects, which amplify market volatility significantly.

Moreover, institutional investors dominate the landscape, creating a tendency for uniform investment behaviorsThe makeup of investors leans heavily towards long-term commitments, raising concerns as the presence of individual investors continues to dwindle

A concentrated investment atmosphere heightens the likelihood of synchronized market movements, thereby exaggerating the effects of market fluctuations.

The operational pressure on the underlying assets further complicates the situation, creating uncertainties about fundamental economic recoverySpecific adverse events can lead to immediate impacts, especially in sectors reliant on industrial parks, where recovery in rental markets tends to lagCurrent market sentiments are largely pessimistic regarding basic recovery prospects, making it challenging to bolster investor confidence amid heightened risks.

Coupled with an evolving but still immature pricing framework, discrepancies in standards pose further challengesUsing a benchmark of a price-to-net asset value (P/NAV) ratio of 1.0, the existing market pricing for property-based REIT products currently seems to be within reasonable limits

In contrast, obtaining accurate evaluations for operating rights-based REITs proves elusive due to fluctuating market sentiment, which continues to fog the waters of valuation clarity.

Despite the rapid descent of the overall market, CICC emphasizes that this should not be interpreted as an outright designation of REITs as undervalued assetsThe high initial valuations post-launch merely foreshadow a phase of value recalibration, underscoring the necessity for steady evolution in the valuation frameworks associated with public REITs in China.

The path forward for public REITs remains fraught with challenges, with some individual products currently navigating difficult watersThe "Huaxin Zhangjiang Guangda Yuan REIT" confronted a considerable setback recently when news broke out on May 12 that the tech giant OPPO would shut down its subsidiary, Zheku Technology, which represents a significant tenant in the Shanghai Zhangrun Building slated for expansion purchases

This tenant's leased area encompasses a whopping 45.97%, which led to a decrease of over 9% in the REIT's shares over two trading days.

By May 16, Zheku Technology formally reassured Shanghai Zhangjiang (Group) Co., Ltdthat it would vacate the property, prompting the REIT to announce that numerous industrial companies were already lined up to cover a total leasing demand exceeding 20,000 square meters.

In a bid to reassure investors, on May 25, Huaxin Fund announced plans to strengthen collaboration with the original asset provider and its controlling affiliates, collectively intending to increase holdings by no more than 300 million yuan and 2 billion yuan, with a minimum holding period of six months.

Nevertheless, despite facing potential tenant turnover issues, the "Huaxin Zhangjiang Guangda Yuan REIT" stands as the best performing one among the original nine publicly offered funds, boasting an impressive return rate of 23.95% as of June 21.

In contrast, the "Ping An Guangzhou Traffic Guanghe Expressway REIT" was caught in its own crisis when it faced a trading halt on June 6 due to a plummet of 11.03% over three consecutive days, halting trading for roughly an hour after the ordeal.

Even amidst a tumultuous second market, a wave of expansions commenced

On June 16, the expansion of the Huaxin Zhangjiang Guangda Yuan REIT, CICC Prologis Logistics REIT, Bosera Solutions Shenhua Industrial Park REIT, and Hongtu Innovation Yantian Port Logistics REIT became officially listedThis signified the initiation of a dynamic dual-focus approach of "new issuance and expansion" within China's public REIT sector.

According to a report from GF Securities, two main implications arise from the expansion process for current holders: dilution effects associated with the volume of additional shares and enhancements in anticipated cash flows from newly acquired assets, which may generate positive impacts for existing investorsNotably, while three out of four REITs benefitted from expansion by increasing cash distribution rates, the Hongtu Innovation Yantian Port Logistics REIT did not see similar advantages.

The head of the research department at Debon Asset Management asserted the vitality of expansion in sustaining REITs, asserting that those without expansion lack lifeblood, and highlighting that the robustness of mature REIT markets globally owes largely to their continual cycles of mergers and expansions.

Looking ahead, Citic Securities suggests that under a mid to long-term lens, the market is expected to expand and diversify through this dual-drive model of new issuances and expansions