FTSE China A50, significant adjustments! Two stocks "selected".

Data as of September 10th shows that out of the 42 public REITs listed, 34 have achieved positive cumulative returns within the year, with 20 of them seeing an increase of more than 10%, 6 having a cumulative rise of over 20%, and 2 exceeding a 30% cumulative increase (see Table 1). We believe that the trend of public REITs fluctuating upwards this year has strong sustainability. In the short term, the most important marginal change is the exemption from stamp duty that the original equity holder and SPV need to pay during the reorganization of underlying assets. In the medium to long term, influenced by factors such as debt burden and population structure adjustment, China's interest rates may maintain a trend of fluctuating downwards, and the low-interest-rate environment may lead to an asset scarcity, where public REITs with dual advantages of capital gains and fixed returns are expected to form a more significant cost-performance ratio.

Furthermore, as a long-term financing tool with Chinese characteristics, public REITs are also very likely to become an important allocation choice for funds with absolute return attributes as the market's main capital practices political and people-oriented requirements. With the regulatory authorities launching real-time indices for public REITs, the subsequent focus will be on the issuance and realization of index-based ETFs related to public REITs.

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>>Short-term catalyst: Enterprise reorganization stamp duty exemption policy reduces REITs issuance costs

On September 4, 2024, the Ministry of Finance and the State Taxation Administration jointly issued the "Announcement on Stamp Duty Policies Related to Enterprise Restructuring and Reformation of Public Institutions" (Announcement No. 14 of 2024 by the Ministry of Finance and the State Taxation Administration, referred to as Document No. 14), which for the first time clarified the tax-exempt policy for stamp duty involving property rights transfer during the enterprise restructuring and reformation process. The reorganization of the project company to which the underlying assets belong is a key link in the preparation and issuance phase of public REITs, and the stamp duty for this link was previously levied at a bilateral rate of 0.05% of the transaction amount. The latest Document No. 14 means that the 0.05% property transfer stamp duty that the original equity holder and SPV need to pay respectively is exempted, thereby reducing the issuance cost of public REITs.

In fact, before the issuance of public infrastructure REITs, the original equity holder usually needs to inject the basic assets into the project company or separate the non-pooled assets, and then transfer the equity of the project company to the special plan. In practice, the infrastructure REITs issued have mostly adopted three reorganization methods: asset transfer (specifically referring to the transfer of assets between entities within the group, including the positive separation of basic assets and the reverse separation of non-pooled assets), corporate division (i.e., the separation of basic assets to the divided company), and non-monetary investment (investing in the project company with basic assets to obtain equity in the project company). According to the latest policy of Document No. 14, the exemption from stamp duty further reduces the complexity and time cost of tax handling, which helps to improve the efficiency of issuance. With the reduction of costs and the improvement of efficiency, public REITs become more attractive to issuers, and also provide greater convenience for the future expansion of the public REITs market.

>>Medium to long-term support: The cost-performance advantage of public REITs is more prominent in a low-interest-rate environment

We reiterate that the underlying assets of public REITs are mainly mature, high-quality, and stable operating infrastructure projects, with relatively clear cash flow expectations, and the volatility of unit value is principledly limited. Secondly, the growth space for public REITs' income is relatively limited. For example, from the perspective of property operations, the possibility of a significant increase in property income or maintaining a continuous high growth is small. On this basis, public REITs have a high dividend ratio. Public REITs have a mandatory dividend ratio, with the distribution ratio not lower than 90% of the annual distributable amount of the consolidated fund, and the income distribution mechanism is stricter compared to other major asset classes.

More importantly, considering factors such as debt burden and population structure adjustment, China's interest rates may maintain a fluctuating downward trend for a relatively long period in the future, and the low-interest-rate environment may lead to asset scarcity, where public REITs with dual advantages of capital gains and fixed returns are expected to form a more significant cost-performance ratio. From the perspective of regulatory policies, it is expected that the future will continue to improve supporting rules and systems, refine project review and information disclosure points, and especially promote more long-term funds that match the characteristics of REITs products to enter the market through innovation in REITs trading mechanisms, development of REITs indices and index products, and accelerating the implementation of REITs interconnectivity mechanisms.

It cannot be ignored that public FOFs are becoming an increasingly important investment force in public REITs products. Because public FOFs are relatively good at balancing and comparing multiple types of assets, industry sectors, and market styles, they have a certain understanding of the market focus in different environments and the cost-performance ratio of various global assets. The increase in public FOF's allocation to REITs will also partially improve the liquidity of public REITs. With the expansion of the public REITs market, coupled with the increasing number of market participants, public REITs are also expected to attract more attention from institutional and individual investors.

>>Focus on innovation in public REITs-related ETF productsIt can be observed that on June 24, 2024, the name and code of the full return index of the China Securities REITs (closing) index were officially adjusted to "China Securities REITs Full Return Index" and "932047". At the same time, to fully consider the reinvestment income of sample dividends and better reflect the overall market performance of the entire market of listed REITs, the China Securities REITs Full Return Index began to update the market changes in real-time from that day.

We believe that the release of real-time REITs market information is more conducive to investors quickly understanding market conditions, as well as the design and promotion ideas of related index products. Moreover, the release of real-time market information of the China Securities REITs Full Return Index will provide an effective reference for the upcoming launch of thematic indices for sub-sectors such as industrial parks, toll roads, and rental housing, so as to provide investors with more timely, detailed, and comprehensive market information in the future, and facilitate horizontal comparisons between sectors, which is conducive to the efficient flow of information.

The significance of disclosing real-time REITs market information is not only to provide investment references for investors but also to lay a solid foundation for the development of subsequent index-based investment products, which is beneficial for attracting incremental funds. We believe that the introduction of real-time market information may attract more investors to pay attention to and invest in the public REITs sector, increase market activity, enhance market liquidity, stimulate more financial product innovation related to REITs, such as REITs index ETF products, and thus facilitate investors in asset allocation and risk management. We believe that if public REITs index-based products are implemented in the future, the enthusiasm of various funds to allocate public REITs may further increase.