China Nears Approval of Its First Public REITs to Ease Debt

(Bloomberg) -- China plans to approve its first real estate investment trusts to help local governments finance infrastructure projects while allowing retail investors to tap into what may become a $3 trillion market.

The regulators may authorize the first few REIT products and get them listed as soon as the first quarter under a trial that began in August, according to people familiar with the matter, who requested not to be named because the matter is private.

A handful of infrastructure projects including a sewage disposal plant operated by Beijing Capital Co., a waste-to-energy electricity generator by Shougang Group and three public transportation projects are on a shortlist, though names are still being finalized, the people said. More projects could be added, they said.

The National Development and Reform Commission, the securities watchdog and Shougang Group didn’t respond to requests for comment. Beijing Capital and The Shanghai Stock Exchange declined to comment.

China Securities Journal reported that the country is expecting to roll out such REITs in the first half, while other local media said the first batch will involve five unidentified projects.

The trial promises to offer mom-and-pop investors a slice of infrastructure projects and their revenue streams. It’s a major step after more than a decade of deliberations. With retail investors financing highways, bridges and business parks, local governments could also alleviate their debt strain.

REITs have become popular around the world among investors seeking access to the real estate sector. The publicly traded trusts typically offer people access to shopping malls and office towers, paying out the vast majority of their income to investors in yields in the range of 4% to 8%.

In China, the trial will focus on infrastructure projects like highways and utilities. The pilot will also include businesses focusing on logistics, data centers and 5G.

While traditional real estate isn’t included in the pilot, Goldman Sachs said the program paves the way for including property projects in the longer term and that the market could be worth as much as $3 trillion one day.

Unlike other countries, China is introducing a framework that allows individual investors to buy shares in a mutual fund, which then invests in asset-backed securities that indirectly hold the infrastructure assets.

The nation’s top economic planning agency, the National Development and Reform Commission, will recommend shortlisted projects to the China Securities Regulatory Commission. Approved projects will be devised and sold by mutual funds, and then traded on stock exchanges, according to earlier statements.