Yuexiu REIT 15 Years: Great Changes In Commercial Real Estate

The 15 years of REITs in Hong Kong are also the 15 years of Yuexiu real estate investment trust (00405. HK, hereinafter referred to as "Yuexiu REIT") which is known as "China's first REIT". It is also the 15 years of active exploration of commercial real estate asset securitization in the mainland.

Yuexiu REIT is the first REIT in the world to invest in property in mainland China. It has been listed for 15 years and its asset scale has increased by more than 7.5 times. However, over the years, apart from China Merchants commercial REITs (01503. HK) successfully landed in the Hong Kong stock market on December 10, 2019, no other domestic real estate stocks have been listed in REITs. The reason lies in that, firstly, the mainland property companies are facing complex equity structure adjustment and tax issues when they are listed on overseas funds; secondly, the regulatory framework of supporting laws and regulations in the mainland is not mature.

In the same period of 2005, the income of Yuexiu REITs has been stable at 6-7%. Lin Deliang, chairman of the board of directors, executive director and chief executive of Yuexiu REITs, has repeatedly mentioned in public that the core business model of Yuexiu REITs is the "Trinity" management mode of asset management, commercial operation and property management, which is the biggest difference between REITs asset managers and conventional real estate companies. Real estate enterprises use PE (price earnings ratio) and Pb (price to book ratio) pricing, but trust listing is to use per unit dividend (DPU) pricing.

In the mainland, the development of REITs in the mainland will enter a critical period in 2020. In April, the China Securities Regulatory Commission and the national development and Reform Commission jointly issued a document to clarify the basic principles, pilot project requirements and pilot work arrangements of the mainland public offering REITs. The mainland version of public offering REITs will officially set sail from the field of infrastructure. Industry insiders predict that commercial real estate will also enter the open ranks of public REITs sooner or later. For the infrastructure public offering REITs in mainland China, the equity structure, management and operation mode of Yuexiu REITs can be used for reference.

Upper air outlet of mainland public offering REITs station

Real estate trust funds are facing development opportunities. On the one hand, the mainland's public offering REITs is on the way; on the other hand, the game rules of Hong Kong REITs have changed, which not only enhances the convenience of property acquisition by REITs in both places, but also provides more possibilities for scale expansion.

Since April, the regulatory authorities have interviewed industry insiders for many times to discuss how to implement public REITs. On December 13, Xiao Gang, former chairman of the China Securities Regulatory Commission (CSRC), and experts including Lin Deliang and other senior personages discussed how to operate the trust fund in a "Trinity" mode of operation.

Lin Deliang proposed that the REITs team should participate in the whole process from the top-level capital management to the middle level lease management and then to the bottom level property management. In an exclusive interview with the 21st century economic reporter, Lin Deliang stressed that the "Trinity" operation mode is the key to Yuexiu REIT's ability to distribute about 7% interest over the years.

Investors buy REIT funds, not to see the annual income growth, but to pursue stable income. For institutions, the Hong Kong stock capital market allows qualified investors to carry out financial leverage. For stocks listed on the short selling list of the Hong Kong stock exchange, stock liquidity premium can be generated. Driven by leverage, the 6% return on the books of institutional investment funds turns into 12%. This has become a driving force for investment institutions.

The development of public REITs in the mainland has achieved a major breakthrough this year, and the mainland commercial real estate has also shown a trend of diversified growth. REITs can help developers to increase the liquidity of self-sustaining property. How to maximize revenue through the appreciation and optimization of underlying assets is a headache for commercial real estate developers and operators. With the growth of holding assets, many developers began to learn and imitate the model of Yuexiu REIT, including the adjustment of equity structure, divestiture and reorganization of assets.

In the eyes of industry insiders, Yuexiu REIT has developed from being only used as an exit platform for Yuexiu commercial assets, and its development right is not in its own hands. Now, property investment and regional selection are more diversified.

The first step of all assets listed on trust is to face the restructuring of equity structure, that is, the restructuring of underlying assets. Over the past 15 years, Yuexiu REIT, from Yuexiu new metropolis, Guangzhou International Financial Center (IFC), Wuhan Yuexiu wealth center, to Hangzhou Victoria center, has to restructure the underlying assets before each acquisition. In order to maximize the value of assets, the asset restructuring methods of each project are different: Hangzhou project carries out asset restructuring in the mainland; Wuhan and Shanghai projects are restructuring overseas; Guangzhou IFC adopts the mode of increasing capital and shares, and the state-owned assets still account for 1% of the project.

It is worth noting that the Hong Kong real estate fund is a perpetual trust. However, in the regulations issued by the mainland in April, the mainland REITs stipulates a trust period of 15-20 years. They are different in financial statements. Perpetual trust management is counted as stock, while term trust management is debt. To this end, the mainland REITs Ordinance has added a special sentence: "the term can be extended", thus opening up a solution for the assets statement of the mainland REITs.

Looking back on the 15 years of development of Yuexiu REITs, Yuexiu REITs has provided a lot of enlightenment to the development of REITs market in the mainland. The reporter of 21st century economic report has learned exclusively that the approval letter for the implementation of the regulations on public REITs in the mainland has been put on the agenda by the regulatory authorities. At present, when adopting the feedback from the industry, the regulatory authorities pay close attention to the following aspects: first, legislation and supervision. The Hong Kong real estate investment trust fund code has been revised to the sixth edition, while the mainland has not issued a special real estate fund law; second, the Hong Kong Securities Regulatory Commission directly regulates listed real estate trusts and has a special real estate trust The Fund Committee provides professional advice; while in the mainland, China Securities Regulatory Commission, the exchange, the national development and Reform Commission, as well as other relevant departments, such as taxation and banks, participate in the examination and approval of public offering REITs, and the control efficiency will be different.

In terms of daily operation, Yuexiu REIT regulates its operation according to a "compliance manual" approved by the SFC. It has been revealed that although Lin Deliang is the chairman and CEO, according to the manual, he is also subject to the strict supervision of the trustee, HSBC institutional trust (Asia) Co., Ltd. According to the compliance manual, the trustee monitors whether the manager's operation, investment, financing and other activities meet the regulatory requirements and the provisions of the trust contract. With reference to Yuexiu REITs, the mainland regulatory authorities communicated whether to let the mainland REITs industry replicate the establishment of such a regulatory mechanism based on the "compliance manual".

For REITs listed in Hong Kong, the fund manager must operate with a license, and the trust fund can only be listed on trust after it has obtained the asset management license No. 9 issued by the SFC. Therefore, Lin Deliang proposed that the mainland regulatory authorities should also have such a license in order to promote industry self-discipline.

In addition, the development of REITs in Hong Kong is relatively faster. In 2005, the joint listing of lingzhan, Hongfu Industrial Trust and Yuexiu REIT was a landmark event.

On June 9, 2020, the SFC launched a two-month public consultation on the proposed revision of the REIT code. The revision of the code has attracted the most attention and will have the greatest impact on the commercial real estate trust funds: allowing REITs to invest in minority interest properties, and allowing the increase of the borrowing limit of REITs from 45% of the total assets to 50%.

On November 27, the Hong Kong Securities Regulatory Commission (SFC) issued an amendment to the code of practice for REITs and clearly stated that it had adopted the relevant suggestions to clarify and revise the scope of application of certain specific provisions. Recently, the fourth policy address of Hong Kong Chief Executive, Mrs Carrie Lam, and the Hong Kong Securities Regulatory Commission (SFC) have made relevant responses to the investment flexibility of REITs listing, so as to serve as a trust for mainland real estate enterprises Listing offers more opportunities.

According to statistics, there are 11 REITs listed in Hong Kong, with total assets of more than HK $510 billion and a market value of about HK $210 billion. There are 6 REITs including mainland assets. Compared with Singapore, Tokyo and New York, the number of REITs is 43, 62 and 78 respectively. There is still a lot of room for improvement in the size of the REITs market in Hong Kong.

Integration of three attributes of Commerce, real estate and Finance

The recent increase in commercial real estate's attention to REITs is due to changes in the situation of commercial real estate, which is also related to the change of land auction rules and the increase of self-sustaining proportion in land transfer. At the beginning, developers will choose to transfer or sell commercial projects as a whole, but the financing methods and channels are limited. Therefore, REITs like products appeared in the financial market. The pilot projects of public offering REITs in the mainland have not been opened to residential and commercial real estate for the time being. There are more REITs concept products in the market, that is, quasi REITs with asset securitization as the carrier.

By the end of last year, the global REITs market had exceeded $2 trillion. From the perspective of commercial real estate, REITs has become one of the main forms of commercial property.

In 2005, Yuexiu real estate initially selected Guangzhou Baima building, Victoria Plaza, urban construction building and Fortune Plaza under the BVI framework to establish an offshore company, and then injected into the independent entrusted company to sell the underlying assets through equity transfer, and finally realized the structure setting of the trust plan.

Other mainland commercial real estate developers, such as Xincheng holdings, Baolong real estate, China Resources, Yinli, etc., still focus on the scale of commercial development mode, and many of them are ready to package their commercial businesses for listing. However, the industry also paid attention to Yuexiu REIT's model, and began to make adjustments in the organizational structure, internal divestiture and restructuring business, emphasizing the maximization of asset value.

The reporter of 21st century economic report learned exclusively that there will be a REIT listed at the end of this year and the beginning of next year.

A research report of Huatai Securities pointed out that the realization modes corresponding to commercial attributes include cash inflow from self-sustaining operation, bank operating loans based on self-sustaining cash inflow, and CMBS and other products; the realization mode corresponding to real estate attributes includes bulk sales and property appreciation based on the rising land price of surrounding properties; the financial attribute corresponds to the wholesale sale of mature projects and potential certificates Securitization opportunities.

As a listed REIT in Hong Kong, Yuexiu REIT has achieved a leap forward growth of total assets from 4.5 billion yuan to 36 billion yuan through "real estate + fund" dual platform interaction and external acquisition, integrating three kinds of realization modes of commercial attribute, real estate attribute and financial attribute.

In 2012, Yuexiu REIT purchased Xita with 13.44 billion yuan, which led to a decrease of 4.5 billion yuan in bank loans and a net cash inflow of about 4 billion yuan. The transaction improved the liquidity situation of Yuexiu real estate, and the scale and valuation of Yuexiu REIT's property under management in that year also jumped to 20 billion ladder, realizing leapfrog growth. In the seven years since the fund was injected into Guangzhou International Financial Center, its revenue has increased rapidly from 170 million in 2012 to 1.133 billion Hong Kong dollars. As of June 2020, the project valuation reached 18.831 billion yuan, an increase of 40.1% over the purchase price. In the first half of 2020, thanks to the interest rate reduction cycle, Yuexiu REIT maintained a reasonable financing structure and exchange rate and interest rate exposure, smoothed the impact of market turbulence on fund performance and grasped the market The market interest rate declined, and the overall financing cost decreased to 3.13%.

After 12 years, foreign capital returns

In 2013, Yuexiu REIT won the investment grade rating of standard & Poor's and Moody's of the world's rating agencies for the first time. In 2015, it was included in the "Hang Seng Composite Index" and entered the "Hong Kong Hang Seng sustainable development enterprise index". Overseas funds began to pay attention to Yuexiu REIT, a trust fund purely engaged in mainland assets, and began to seek cooperation with Yuexiu REIT in merger and acquisition. From the perspective of yield, the investment mode of overseas funds for mainland commercial real estate is also changing. European funds look at the trend, looking at RMB assets, exchange rate, rental return, asset return and other indicators.

The reporter of 21st century economic report exclusively learned that since November, many overseas fund executives have personally gone to Shanghai, Beijing, Guangzhou, Shenzhen and other first tier cities to investigate projects, mainly office buildings. Correspondingly, Shanghai Lujiazui business district has recently sold two office buildings, one of which is held by Singapore Government Investment Corporation (GIC) and the Bank of East Asia building held by AIA, with a total of 10 floors, which are also packaged for sale.

According to incomplete statistics, after the outbreak of the epidemic, the rent of office buildings in Shanghai business district has dropped by 20-25%. In the second half of the year, Wework, a joint office brand, rented the whole building of Baosteel building with a total floor area of 75000 square meters. As recently as June, there were rumors in the market that Wework might have plans to withdraw its rent.

A person in the industry believes that foreign fund executives would rather pay the time cost of isolation for 14 days, but also go to the mainland to investigate projects. It can be seen that foreign investors have renewed interest in domestic commercial real estate bulk properties. It is expected that in the second and third quarters of next year, the volume of block trading in China's first tier cities, especially Shanghai, will rise.

Lin Deliang pointed out that the last round of foreign acquisitions of domestic commercial real estate was in 2008. There are two reasons for the return of foreign capital after 12 years: first, it is related to the asset value and interest level. At present, foreign interest is at a low level in the past 12 years; second, the appreciation of RMB. Foreign investment in China at this time, leverage is big, accounting statements are also good, driving force. This virtually creates pressure on Yuexiu REIT, but Lin Deliang is very confident that Yuexiu REIT runs through the "development + operation + finance" whole chain asset management, "they may also come to us for management in the end".

Foreign investors prefer Dawan district this time. In March 2017, the construction of Guangdong, Hong Kong and Macao Bay area was included in the work report of the Chinese government for the first time, which was upgraded as a national strategy. In this year, Guangzhou also entered the "two trillion club" after breaking through trillion yuan in 2010, and its economic aggregate ranked among the top 20 cities in the world.

KPMG China, HSBC and Hong Kong General Chamber of Commerce conducted a survey on 747 executives from the mainland, Hong Kong and Macao. They came from financial services, professional services, manufacturing, trade and logistics, technology and innovation, real estate, retail and other industries. According to the survey report, more than half of the companies plan to expand their business to Dawan district by 2022. Among them, 61% of the enterprises headquartered in nine mainland cities in the bay area are willing to do so.

From the perspective of asset value and risk resistance ability, Yuexiu REIT will continue to cultivate in Guangdong, Hong Kong and Macao in the future. It will focus on high-quality office building projects in the first and new core areas of China's core cities, enhance the ability to resist market volatility risks, and realize the strategic and in-depth layout of the most dynamic economic belt in China's economy.

Opportunities and challenges of Yuexiu REIT

After 15 years of listing, Yuexiu REIT has been able to achieve a breakthrough in this period because it has built a "real estate + fund" dual platform interactive mode with Yuexiu real estate, forming a commercial closed-loop of "investment and development + commercial operation + financial exit", that is, the complete chain of "input, operation, exit, output and Reinvestment".

In the kaiyunjin mode, it can be simply seen as the flow of assets and funds between the two ports of "real estate products" and "real estate financial products", corresponding to Yuexiu real estate and Yuexiu REIT. In terms of strategy, this is to take asset light operation as the core, inject assets into different platforms in different periods of commercial real estate, so as to meet the investment preferences of various investors, reduce the overall financing cost and maximize the asset value.

In this cooperation mode, the injected assets meet the requirements of clear ownership of the project, mature business model and market-oriented operation ability. For Yuexiu REIT, this is a kind of quality growth, that is, the newly added high-quality assets need to meet the requirements of clear project ownership, mature business model and market-oriented operation ability.

At present, Yuexiu real estate holds 38.4% of the equity of Yuexiu REIT, and the share proportion is maintained between 30% and 40%. According to people familiar with the matter, Yuexiu REIT may have new moves in the Hong Kong stock market in the near future.

Operation promotion, asset improvement and financial improvement are the three magic weapons of Yuexiu REIT's asset management. Taking office building operation as an example, Lin Deliang believes that the structural adjustment of project tenants should be combined with the surrounding industrial attributes. In 2015, after Yuexiu REIT acquired Yuexiu building (formerly known as "Hongjia building") in Zhuyuan, Pudong, Shanghai, from Carlyle, it conducted in-depth investigation on the industrial opportunities brought about by the relocation of Shanghai Stock Exchange and the entry of Zhuyuan into the free trade zone, and established a new goal of "growing financial and trading enterprises" by benchmarking with Hong Kong trading square, Focus on the introduction of professional service institutions related to securities, and upgrade the products and services of the project.

It is understood that the office buildings under Yuexiu REIT have 30% customer liquidity every year. They interact with tenants or potential tenants deeply, understand the products and services of supporting buildings, continue to introduce tenants with the ability to pay, and create a reasonable tenant structure. The adjustment of tenants is a matter of water to channel. Lin Deliang believes that this is the core logic of asset management.

In the face of irresistible factors, the anti risk ability of trust fund's property portfolio is very important. Taking Yuexiu REIT as an example, the rate of return (DPU) of each fund unit is very high. The annual return rate of Yuexiu REIT's rent is 4%, but it can distribute more than 6% interest every year.

Lin Deliang pointed out that this is related to the property structure. During the epidemic period, most shopping malls in the mainland suffered a significant decline in revenue due to the rent-free period for merchants. 52% of Yuexiu REIT's asset portfolio is office buildings, of which 72% are mature properties and 28% are growth properties. The income from shopping malls only accounts for 8%. The performance of the fund in the first half of 2020 is better than the market expectation.

In the next five years, more and more real estate companies will hold their own land, so it will be a trend for domestic real estate companies to choose REITs for listing.

With the advent of the stock age, commercial real estate has gradually shifted from real estate property to commercial property and capital attribute, and developers have changed from scattered holding to whole holding. The three red lines and the reduction of leverage make the real estate industry face greater uncertainty. The era of land and financial dividend has passed.

As real estate is a capital intensive industry with long investment cycle, enterprises need to expand financing channels, so asset securitization has become a hot spot. According to the statistics of Dai de Liang, in 2019, the mainland commercial real estate asset securitization market continued the rapid development momentum of the previous year, with a total of 81 products issued, and the issuance scale reached 155.08 billion yuan, with a year-on-year growth of 42.1% and 36.3% respectively.

The expansion opportunities and challenges of Yuexiu REIT lie in foreign funds. In front of foreign funds, the core competitiveness of Yuexiu REIT is not only the trinity management mode, but also the stability of interest distribution. As of November 30, 2020, the total market value of Yuexiu REITs reached HK $12.1 billion, and the dividend yield was 7.32%, both of which were among the top 11 REITs in Hong Kong.

With the opening of REITs gate, high-quality assets will be in short supply in the future, which may lead to the shortage of high-quality assets. Yuexiu REIT, which has been established for 15 years, will be further favored by investors with its high-quality underlying assets and unique business model. This kind of portfolio and fund risk control mode has certain reference significance in today's boom.