Real estate developers have finally seen a glimmer of hope.

A ray of hope has finally emerged for real estate developers in the midst of a sluggish market and liquidity crisis. On October 26th, the official website of the China Securities Regulatory Commission (CSRC) announced that Jiashi Fund, Huaxia Fund, and China International Capital Corporation (CICC) Fund have started applying for the first batch of domestic public REITs (Real Estate Investment Trusts) in the consumer infrastructure sector. These include Jiashi Wumei Consumer REIT, Huaxia Jinmao Shopping Center REIT, Huaxia CR Commercial Asset REIT, and CICC Yinli Consumer REIT.

This signifies a breakthrough for the long-awaited commercial real estate public REITs after nearly two decades of exploration. Prior to this, public REITs only covered areas such as warehousing and logistics, industrial parks, new infrastructure, and affordable housing.

The issuance of public REITs opens up another financing channel for developers' operational projects, completing the commercial loop. For the real estate industry, which has been facing financial constraints and sluggishness, this can be seen as a shot in the arm.

More importantly, this marks a transformative change that has been twenty years in the making. While ordinary Chinese residents have primarily invested in real estate by buying houses and apartments worth millions or even tens of millions of yuan over the past thirty years, public REITs will now enter the asset allocation pool for individuals, allowing them to invest with as little as 1,000 yuan. This will create a trillion-yuan market.

A new era of operations, even more exciting than the development era, has begun.

Breaking New Ground

In fact, discussions and preparations at the policy level had already begun before the launch of the first batch of consumer infrastructure REITs.

In March of this year, the National Development and Reform Commission (NDRC) and the CSRC issued separate documents, including consumer infrastructure in the scope of infrastructure public REITs pilot projects, prioritizing the issuance of infrastructure REITs for department stores, shopping centers, farmers' markets, and other urban and rural commercial projects that guarantee basic livelihoods.

On October 20th, the CSRC issued another document, officially expanding the types of assets for public REITs to include consumer infrastructure. Just six days later, the first batch of consumer infrastructure public REITs was released.

Specifically, consumer infrastructure public REITs are based on commercial real estate projects such as shopping malls and farmers' markets, which generate stable long-term cash flow from rental income. Investors can acquire ownership of REITs through investment and receive stable cash distributions, as well as enjoy the value appreciation and preservation of the underlying assets.

According to Wall Street Journal, the first batch of commercial REITs includes three properties owned by well-known domestic developers, such as Vanke Yinli Hangzhou Xixi Impression City, CR Qingdao Wanda Plaza, and Jinmao Changsha Lanshow City, as well as commercial assets owned by Beijing Wumei Commercial Group, including supermarkets. A fund manager who has long been committed to the implementation of public REITs stated that the breakthrough this time is because these underlying assets have met the investment return requirements of REITs and also because the policies have provided certain tax benefits. Of course, each company has put forward its own high-quality assets.

Taking CICC Yinli Consumer REIT as an example, the asset provider is Yinli Group, a subsidiary of Vanke, and the underlying asset is Xixi Impression City in the core business district of Hangzhou, with a total construction area of 250,000 square meters, 367 merchants, and a rental rate of 99.2%. Vanke believes that this contributes to the expected income of this REIT issuance. The discount rate used in this evaluation calculation is 7%.

In addition to the quality of the underlying assets, the key to whether REITs can be successfully issued and continuously expanded lies in the operational and management capabilities of the asset providers. As a shopping center development and operation platform under Vanke, Yinli Group has a total commercial area of over 12 million square meters under management nationwide, with assets totaling over 100 billion yuan and an overall rental rate of 95%.

According to Yinli's disclosure this time, 50 projects have been in operation for more than three years and can be used as potential expansion assets.

As a pioneer and explorer of commercial real estate REITs, Vanke issued Penghua Vanke Qianhai Mansion REITs as early as 2015, but this product still has differences from true REITs. In the 3 billion issuance scale, half of it was used to purchase Qianhai Mansion, a BOT project owned by the Qianhai Authority, and the other half was used to purchase fixed-income bond products.

The real income of REITs should mainly come from rental income and real estate appreciation.

In the following years, Vanke and Yinli Group also attempted to issue Longgang Vanke Plaza REITs and Wanwei Logistics First Phase REITs, which were among the products in China that were closest to mature overseas REITs at that time.

In the past three years, Vanke has continuously improved the asset quality of its operating properties in accordance with the requirements and standards of REITs issuance, and finally got a taste of public REITs.

With the continuous development of public REITs, the types of underlying assets continue to expand, and the market trading scale and activity continue to rise. Vanke's operating business is also expected to contribute new value growth points to the company.

In addition to Vanke, China Resources and Jinmao also have multiple shopping centers available for expansion in addition to the underlying assets included in this round.

Yan Yuejin, the research director of E-House Research Institute, believes that the application for the issuance of these four REITs indicates that commercial real estate REITs have made a key breakthrough and entered a normalized operation process.

Trillion-dollar Imagination

For real estate companies, the expansion of public REITs to the commercial real estate field will provide assistance to the real estate operation of developers. It is equivalent to opening up a new financing channel and becoming another major support from real estate financial policies following the "16 Financial Measures" and the Three Arrows in the second half of last year. It also provides real estate companies with another way to dispose of assets and activate funds. Looking at the long term, this is a breakthrough in the significant financial support measures for the real estate industry, transitioning from the first half to the second half, from development to operation.

"After much anticipation, it has finally arrived! Just like mortgage loans over twenty years ago, which fulfilled the dream of homeownership for countless families; today's REITs will help us transform from real estate developers to operators of immovable properties, providing investors with more choices. Its profound impact will become evident over time," said Yu Liang, Chairman of Vanke, excitedly.

A few days ago, he also mentioned at a media exchange meeting in Xi'an that the importance of REITs to property operations is similar to that of mortgage loans to residential development, as it completes the business model.

"For developers, REITs provide an exit mechanism for self-owned commercial properties, and the key is to increase the liquidity of commercial properties. This is beneficial for developers to recover funds," said Su Jianting, Deputy General Manager of CBRE Guangzhou, a global real estate services and investment company, and head of the investment and capital markets department. She added that the potential market size is undoubtedly significant.

In Guangzhou alone, there is a total of 6.29 million square meters of prime commercial space, and there are also some well-known developers with a large amount of self-owned commercial properties. Not to mention the nationwide scope, there should be many commercial properties that meet the requirements for REITs.

From a historical perspective, the continuous expansion and breakthrough of REITs is the trend in China's real estate industry. In more than 40 countries and regions such as the United States and Singapore, the development of REITs is already very mature, especially in the United States, where REITs cover a wide range, including residential, apartments, infrastructure, industrial plants, hotels, and more.

According to a research report by Guojin Securities at the beginning of the year, the total global size of REITs is currently about 13.5 trillion yuan (1.96 trillion US dollars), with the United States accounting for about 9.1 trillion yuan.

The breakthrough of commercial real estate REITs will also open up a new trillion-dollar market for China. Guojin Securities stated that China's commercial assets are expected to support a REITs market with a trillion-level scale in the long term.

From the perspective of China's capital market and even macroeconomic expectations, this also brings a sense of warmth. Zhu Jin, an analyst at CITIC Securities, pointed out that the issuance of consumer infrastructure REITs can not only alleviate risks in the real estate sector but also expand consumer demand, further supporting steady economic growth and boosting confidence in the capital market.

In any case, the breakthrough of commercial real estate REITs is a crucial step for real estate companies that are transitioning to a "focus on operations" strategy, especially for companies like Wanda, Vanke, China Resources, Longfor, and New World Development, which hold a significant number of commercial properties. With the integration of "investment, financing, management, and divestment," their future transformation is becoming clearer. This will be a new real estate arena where assets and service capabilities conquer all.

After going through a period of rapid growth, a new era of real estate is slowly unfolding.