In July 2021, with the release of "Document No. 958", affordable rental housing was included in the pilot scope of infrastructure REITs. After a year of active promotion by regulatory authorities and all parties in the industry, on August 31, 2022, Hongtu Shenzhen Anju REIT, CICC Xiamen Anju REIT, and Huaxia Beijing affordable housing REITs were officially launched as the first batch of affordable rental housing REITs pilot projects, with a total issuance scale of 3.797 billion yuan, which is a further expansion of China's public REITs covering the asset field. Since the three-select pilot projects were officially accepted by the exchange, they have continued to receive close attention from the market. The multiples of offline and online subscriptions in the issuance process have exceeded 100 times, reflecting the market's high recognition of REITs for the guaranteed rental housing products.
China's economy has entered a new stage of development, and solving structural problems has become a key point in achieving high-quality development. How to achieve common prosperity, how to achieve smooth transformation of the real estate industry, and how to further play the role of the capital market are three structural problems facing our country at present. These problems intertwined and influenced each other, aggravating the difficulty of reform. The key to solving the problem is to find the intersection of these problems. The launch of affordable rental housing REITs is not only a linear continuation of China's public REITs pilot, but also a major reform measure to promote common prosperity, transform the real estate industry into a new development model, and further play the role of the capital market.
Cai Jianchun, Liu Qiao, Zhang Zheng, Zhou Qian, etc.
CITIC Publishing Group Publish
Affordable rental housing REITs are major reform measures that directly respond to the three structural problems of high-quality economic development in my country
First, affordable rental housing REITs are policy choices to expand domestic demand and achieve common prosperity.
Income inequality in my country is mainly reflected in the urban-rural binary structure. In 2020, the disposable income of urban residents in my country was 2.56 times that of rural residents, and 2.66 times in the western region. The disposable income of a large number of rural residents is very low, and the proportion of property income is even lower. To achieve common prosperity and inclusive growth, it is necessary to narrow the income gap between urban and rural residents. This is the biggest issue that needs to be considered for high-quality and sustainable and balanced economic development. An important reason for the formation of the urban-rural dual structure is that the degree of urbanization of the migrant agricultural population is very low. Their effective working hours, income sources, and development opportunities are different from those of urban residents, and they are not equal in enjoying public services. Making a large part of migrant workers and flexible urban employment personnel truly transformed into new citizens is the key to solving the urban and rural dual structure in China and narrowing the disposable income gap between urban and rural residents, and it is also a feasible policy path.
China, which realizes socialist modernization by 2035, needs to match the employment structure and industrial structure. According to the estimates of the Peking University Guanghua Ideological Power Research Group, in the next fifteen years, more than 20% of the employed population, or 150 million, will need to be relocated to the secondary industry or service industry. In the context of changes in industrial structure and population mobility, the urbanization of agricultural migrant population will bring about a large demand for housing, especially for housing rental.
Affordable rental housing REITs can promote the scale and specialization of affordable rental housing, provide different demand supply for different new citizens, so that agricultural migrant population can live in cities. When a city has a large influx of population, its industrial structure optimization level and investment efficiency in the public service field will be improved. From the perspective of new citizens, the agricultural migrant population can live in cities, and their consumption capacity and investment in their own human capital will also be improved. This is an important way to solve the problems of inequality in income distribution, wealth inequality, and development opportunities among urban and rural residents.
Second, affordable rental housing REITs will help promote the transformation of my country's real estate industry to a new development model.
Since the real estate reform was launched in 1998, my country's real estate industry has experienced a stage of rapid development for more than 20 years. In recent years, real estate has gradually entered a new stage of focusing on stocks and incrementals from the incremental stage. The "fast turnover" business model with commercial housing development as the core is no longer sustainable. my country's real estate industry is generally facing great pressure for strategic transformation. "Holding real estate" is an important direction for the transformation of the domestic real estate industry, and the specific asset type of "affordable rental housing" provides an important practical tool for the smooth transition of the entire industry. On the one hand, affordable rental housing is in a stage of rapid development in my country, and there is a large demand for investment and construction in the future; on the other hand, affordable rental housing has a certain correlation with traditional residential business in terms of product form, management model, etc., providing real estate companies with reasonable and feasible transformation choices.
As an equity-based mature asset holding platform, affordable rental housing REITs can provide effective exit channels for affordable rental housing companies, so that companies can form a closed loop of project development and exit while not accumulating debt, form a new model of sustainable development of "development, operation, and revitalization", increase the equity financing ratio of the rental housing industry, and reduce the leverage ratio and financial risks in the rental housing industry. The development and growth of affordable rental housing REITs will help improve China's current market structure dominated by individual supply, promote the development of the housing rental market to scale, institutionalization and professionalization. By providing tenants with rental housing that is suitable for needs, it will help solve the problem of supply structure imbalance in the current housing rental market; at the same time, by improving the level of rental services, stabilizing the rental relationship, standardizing the behavior of rental market entities, and protecting the rights and interests of tenants, it will help solve problems such as poor rental quality and unstable rental periods.
3 Third, affordable rental housing REITs are a concrete manifestation of further giving full play to the functions of the capital market and serving the high-quality economic development.
At the end of 2020, the Central Economic Work Conference emphasized that "highly attaches importance to the construction of affordable rental housing" and "accelerate the improvement of long-term rental housing policies", and established it as one of the eight key tasks of economic work in 2021. The 2021 government work report pointed out: "Effectively increase the supply of affordable rental housing and shared-ownership housing" and "do your best efforts to help new citizens, young people, etc. alleviate housing difficulties." The 14th Five-Year Plan and the 2035 Vision Outline clearly state that "accelerate the cultivation and development of the housing rental market, effectively activate existing housing resources, and effectively expand the supply of urban rental housing in an orderly manner."
During the 14th Five-Year Plan period, 40 key cities across the country plan to add 6.5 million units (rooms) of affordable rental housing, which is expected to help 13 million new citizens, young people, etc. alleviate housing difficulties. At the same time, we also see that under the original investment and financing model, the affordable rental housing industry still faces challenges in terms of land costs, funding sources, operation and management efficiency, and REITs, as an innovative financial product that naturally matches the heavy asset industry, plays a key role in solving current related problems in the industry.
Development of affordable rental housing REITs is to help the housing rental market "drive incremental growth with existing stock." The task of building affordable rental housing during the 14th Five-Year Plan period is arduous, and the source of funds is undoubtedly an important influencing factor in whether the national strategic goals can be achieved. Revitalize mature existing assets by issuing affordable rental housing REITs and using recycling funds for new project construction will help build a virtuous cycle of investment in rental housing and achieve "driven incremental use of existing stocks." As a financial product publicly issued by the capital market, REITs have a low investment threshold and can make use of social funds in the widest range and the maximum extent, further enhancing the participation of social capital in the field of affordable rental housing.
Developing affordable rental housing REITs is a feasible option to optimize the existing financing methods of housing rental companies. At present, asset IPOs (REITs) may be more suitable tools than direct IPOs for rental housing companies.The value proposition of REITs lies in continuous and stable rental cash flow, and growth is not the key to valuation. The valuation logic of the stock market (especially the A-share market) focuses on growth and light cash flow. Therefore, the valuation logic of REITs is more consistent with the business logic of rental housing, which can form a benign market incentive.
Three-size rental housing REITs pilot project has achieved good demonstration effects.
Affordable rental housing has continued to receive high attention from the market since it was included in the pilot scope of infrastructure REITs. The successful listing of the three-single pilot project was not only highly recognized by market investors during the issuance stage, but also played a good demonstration effect for the future development of the affordable rental housing industry and the guaranteed housing REITs in terms of industry models, system construction, operational processes, valuation pricing, etc.
First, open up the "sponsorship, investment, management and withdrawal" cycle, and "drive incremental with stock" has significant effect. The three-standard rental housing REITs funds issued and listed this time have a total issuance scale of 3.797 billion yuan. After deducting the original equity holder's strategic allocation and repayment of existing loans, the cumulative net recovery funds exceed 2.2 billion yuan. At the same time, according to the disclosure of public documents such as the "Recruitment Prospectus" and other public documents, the original stakeholders of the three insurance housing REITs intend to use all the net recycling funds for the construction of new affordable rental housing projects, involving at least 8 projects in total, and conservatively estimated that the total investment scale exceeds 30 billion yuan.
Second, improve system construction and implement the development positioning of the "housing for living, not for speculation" industry. On May 27, 2022, the General Office of the China Securities Regulatory Commission and the General Office of the National Development and Reform Commission jointly issued the "Notice on Standardizing the Work of Real Estate Investment Trust Funds (REITs) in the Field of Infrastructure for the Pilot Issuance of Affordable Rental Housing" (Securities and Supervision Office [2022] No. 53), which clearly requires that "the promoter (original stakeholder) shall not carry out commercial housing and commercial real estate development business as an independent legal entity that carries out affordable rental housing business." On this basis, the Shanghai and Shenzhen Stock Exchanges successively issued the "Guidelines for the Application of Publicly Offered Infrastructure Securities Investment Funds (REITs) Rules - Affordable Rental Housing (Trial)", which proposed further specific measures to effectively isolate the original stakeholder from commercial housing and commercial real estate development business in terms of assets, business, finance, personnel and institutions. The issuers of the first batch of affordable rental housing REITs projects (Shenzhen Talent Available Housing Group, Xiamen Available Housing Group and Beijing Available Housing Center) are all specialized companies engaged in affordable rental housing business in the region. During this pilot process, the concept of "special funds and special use, special responsibility" was strictly implemented, and special management was achieved in terms of legal status, construction subjects, and fund use. At the same time, information disclosure was strengthened, effectively avoiding the risk of raised funds flowing into the real estate market.
Third, propose reasonable solutions to the diversity problem in issuance. Most of the existing affordable rental housing in my country are transformed through the guarantee certification procedure based on the existing assets of various types of rental housing. Therefore, my country's affordable rental housing industry shows strong diversity and differences in land ownership types, product market positioning, business management model, pricing adjustment mechanism, etc., which objectively increases the issuance complexity of affordable rental housing REITs products.
The first batch of affordable rental housing REITs have made useful explorations and attempts in all aspects: in terms of land acquisition methods, the Xiamen Housing Project has converted it into land transfer fees by paying the land transfer fee based on the original allocated land; in terms of product market positioning, there are both public rental housing for basic people's livelihood security, and talent housing mainly serving "new citizens" such as new graduates and young people; in terms of geographical location, the first batch of rental housing projects are also distributed in many key cities such as Beijing, Shenzhen, and Xiamen. The differences in transfer restrictions and pricing adjustment mechanisms in various places have also been fully researched and demonstrated during this pilot process.
Fourth, give full play to the capital market pricing function and initially build a valuation system for affordable rental housing. Affordable rental housing has been developing in my country for a short time and lacks market transactions. The rental pricing and adjustment mechanism are still in the process of exploration and optimization. Therefore, the valuation and pricing of affordable rental housing when issuing REITs has always been a core focus. How to determine the discount rate, how to predict the future rental growth level, what relationship does the asset in different regions show in pricing, and what the capital market prefers the risk and return of the rental housing REITs. These key issues have formed many preliminary results that are very reference-based to the market in the process of promoting the first batch of rental housing REITs pilot projects.
Currently, among these three policy-insured rental REITs, the discount rate does not have a significant difference between different projects in different locations, and is generally in the value range of 6.0% to 6.5%. This discount rate level is relatively similar to the existing comparable urban-level industrial park REITs products. In terms of rent growth rate forecasting, the three pilot projects generally adopt a prudent prediction method of "taking the market-oriented rent adjustment range as a reference, taking into account the social and livelihood attributes of rental housing", and the simulation assumption of rent growth rate is more conservative and moderate compared with the market-oriented level. From the perspective of the capital market, on the one hand, the price performance of the 14 listed projects in the early stage provides a reference for the pricing of this insured rental housing REITs. We also look forward to seeing that after the three insured rental housing REITs are listed, with the help of the price discovery function of the capital market, it can provide better pricing guidance for the investment and construction of the affordable rental housing industry.
Four suggestions on the future development of affordable rental housing REITs
The good socio-economic utility of affordable rental housing REITs has been initially revealed. In order to more effectively promote the continuous expansion of affordable rental housing REITs and help my country's affordable rental housing industry accelerate its development, it is recommended to optimize the following aspects:
First, further encourage multiple subjects and multiple types of assets to participate in the issuance of affordable rental housing REITs products. In terms of the original stakeholders, the first batch of pilot projects of are mainly concentrated on rental housing operation enterprises with local government nature. In the future, private enterprises and real estate background enterprises can be further encouraged to participate in the issuance of guaranteed housing REITs products. In addition, for other affordable rental housing projects other than the transfer land acquisition methods (allocated land, village collective land, etc.), the feasibility of issuing REITs can also be further explored. All types of market entities are encouraged to participate in the operation of underlying assets of affordable rental housing REITs to improve the quality of asset operation.
Second, in terms of taxation, in accordance with the principle of tax neutrality, we will target and improve the supporting tax policies for affordable rental housing. With the release of Announcement No. 3 of the Ministry of Finance and the State Administration of Taxation in January this year, some important issues in infrastructure REITs in the issuance and restructuring process and the existing operation process have been clearly arranged. However, in the field of affordable rental housing, the tax department still needs to provide further clear guidance on whether some of the existing tax policies in my country's existing housing security system can be widely applicable (such as tax incentives related to public rental housing) and whether the guarantee certification will have an impact on some of the tax policies that have been enjoyed after completing the guarantee.
3 Third, formulate reasonable and stable subsidy policies and rent adjustment mechanisms, build a business logic that conforms to the guarantee attributes, and form a long-term mechanism for the development of affordable rental housing. Since there are many differences in subsidy policies and rent adjustment mechanisms related to affordable rental housing in different places, and the actual implementation is not exactly the same as existing policies, the forecasts on subsidies and future rental growth are still a common problem in terms of valuation pricing of REITs in the rental housing. From the perspective of more transparent and professional development of the industry as a whole, it is recommended to continuously optimize the rent subsidy policy and rent adjustment mechanism, explore the combination of social and people's livelihood attributes and REITs' market-oriented logic, and form a more scientific and stable long-term development mechanism.
Fourth, combine the reform of the housing provident fund system with the construction of rental housing and the development of rental housing REITs to promote the construction of a new housing system. On the one hand, housing provident fund participates in the construction of affordable rental housing from the supply side with housing rental companies, social capital, etc. through equity investment; on the other hand, housing rental companies mainly provide job-housing balanced, cost-effective, and multi-level housing products for all kinds of tenants such as new citizens, young people, agricultural migrant population who pay provident fund, and tenants enjoy certain rent discounts. This plan not only helps the truly integrated agricultural migrant population into cities and eliminates various inequalities caused by "identity identification", but also effectively expands the contribution of housing provident fund, increases the investment income of housing provident fund, and makes provident fund a supplement to the pension of the contributor. In addition, industries related to the upstream and downstream supporting facilities of rental housing can be developed, and community construction will become one of the pillars of social stability.
*Source of this article: Peking University Guanghua School of Management
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