News Alert: two Stock Exchanges have issued the final guidelines on asset injection and unit placement for C-REITs
- The final guidelines closely mirror the guidance issued in mid-Apr. There is one distinctive feature to remove the 50% of allotment limit to sponsor for share placements, which enables REIT managers with the flexibility to mitigate financing risks during a volatile market environment
- Potential rental waiver to tenants and upcoming IPO lockup expirations remain the major overhangs for near-term sector performance
- With two more IPO applications from rental housing sponsors and increasing support from regulators, we believe this will attract more investors into the REIT sector, which has a defensive growth profile amid growing economic growth headwinds
What’s new?
Both Shanghai (SSE) and Shenzhen (SZE) Stock Exchanges have issued final guidelines on asset injection and unit placement for C-REITs.
SSE: News link
SZE: News link
Our view
Largely consistent with drafted versions. The final guidelines closely mirror the guidance issued in mid-Apr. There is one distinctive feature to remove the 50% of allotment limit to sponsor for share placements, which enables REIT managers with the flexibility to mitigate financing risks during a volatile market environment. We believe this allows C-REITs to enjoy inorganic growth backed by its sizeable sponsors’ pipeline.
Near-term overhangs weighing on recent performance. There is a risk of C-REITs having to give 3-6 months of rental waivers to its tenants, as most of its sponsors are SOEs. The impact could be material due to the C-REITs’ concentrated exposure in a single region like Shanghai, Beijing and Suzhou which are impacted by lockdown measures. Besides, there will be upcoming IPO lockup expirations for the first batch of C-REITs in late-June; units held by strategic investors (12-month lockup period) represent 32%/108% of total market cap/existing free-float. This should continue to pressure near term performance.
More push to vitalize the market. With two more IPO applications from rental housing sponsors and increasing support from regulators, we believe this will attract more investors into the REIT sector, which has a defensive growth profile amid growing economic growth headwinds.