Chinese hospitality assets are “very hot” and “the best asset class” among real estate sub-sectors apart from data centres, says John Lim, chairman of JL Family Office and the Asia Pacific Real Assets Association (Aprea).
Speaking to the media on the sidelines of the Asia Pacific Real Assets Leaders’ Congress on Oct 9, Lim says domestic tourism in China promises strong demand for “mass market” three- and four-star hotels within the country.
Hotels could be the next sub-sector approved for public listing via Chinese REITs (C-REITs), says Aprea CEO Sigrid Zialcita. Speaking to the media alongside Lim, Zialcita thinks hospitality assets could be the sixth C-REIT sub-sector approved by the China Securities Regulatory Commission (CSRC) and National Development and Reform Commission (NDRC) after infrastructure, industrial, rental housing, elderly care facilities and consumption categories.
Lim, a Singaporean billionaire who co-founded real estate fund manager ARA Asset Management in 2002, believes Chinese real estate will recover soon, citing the A-share market’s recent rally.
The benchmark CSI 300 Index, for example, has surged 27.7% over the past six months, and some 18% over the past three months. The Hang Seng Index, meanwhile, has rallied more than 36% year to date.
See also: CapitaLand Commercial C-REIT debuts on Shanghai Stock Exchange
“The stock market is running so much in China… When you start to make money in the stock market, where do you go? You go and buy real estate,” says Lim. “So, real estate is always lagging behind the public market; it’s the same in Singapore.”
China’s real estate market was hit on multiple fronts in the initial years of the pandemic, with office and retail asset owners reckoning with work-from-home policies and the rise of e-commerce respectively, notes Lim.
Residential players, too, were exposed for their overleveraged balance sheets when rates rose and sales fell, adds Lim, pointing to the collapse of Evergrande, once China's largest property developer.
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In the thick of this, the launch of the C-REIT regime in June 2021 helped bring liquidity to the real estate market. Lim says he met with Chinese regulators as early as eight years ago to explain the REIT structure. “They are very slow… but once they take off, I tell you, they will be fast.”
Already, China has seen 75 REITs debut on the public market — the latest of which was CapitaLand Commercial C-REIT’s (CLCR) Sept 29 debut on the Shanghai Stock Exchange, which raised RMB2.29 billion ($409 million).
With the addition of CLCR, the C-REIT market now has a market capitalisation of US$31.3 billion ($40.57 billion), which is still about a third of the Singapore REIT (S-REIT) market.
Lim believes the C-REIT market will “pick up” very soon. “They’re just in the trial years like Singapore 25 years ago, but once this asset class grows, it can be as big as the US [REIT market] at [more than] US$1 trillion.”
Still, Chinese regulators have been rolling out the C-REIT market in phases. For example, CLCR is the 11th consumption C-REIT to list, and the first to list with two assets in its IPO portfolio; the prior 10 retail C-REITs have only one asset each.
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CLCR, along with its peers, also faces a one-year moratorium from its listing date, which blocks new acquisitions. Another rule stipulates that the total asset value of a C-REIT shall not exceed 140% of its net asset value, translating to an effective aggregate leverage limit of 28.6%, nearly half that of Singapore’s 50% limit for S-REITs.
Despite this, Lim does not think that Chinese regulators are overly conservative. “I think they are being careful… The biggest fear for any government, including Singapore, is that asset owners keep all the good assets and place the lousy ones into a REIT.”
Lim adds: “It’s good for the governments to control [and] slowly let go, and make sure that they check all the quality of the assets. Of course, there will still be assets that come in and fail, but they cannot afford a major failure… One blow-up and that’s it; the confidence is gone. Markets are all about confidence.”
Should China remove these restrictions, its C-REIT market would triple in value overnight, says Lim. “But when I went there, I talked to the officials, I told them [they] cannot open up too quickly. Once you do, you start to have secondary or third-quality assets coming into the market, and [if] they fail, then confidence is totally wiped out [and] this whole market cannot recover anymore.”
Lower rates
The best-case scenario for the global real estate market is for the US Federal Funds Rate to continue to fall, ideally to 3.5%, says Lim. “Then, it’ll be positive for business and positive for real estate, because real estate hates [a] high interest environment.”
Non-performing assets across Asia are the “biggest opportunity” in the market today, says Lim. “I take Singapore out [but in] the rest of Asia — valuations have come down: China, Hong Kong, even Japan [and South] Korea. Australia is bad.”
According to Lim, Western capital is now looking at Asia. “They are all looking at non-performing assets; they want to buy assets at 30%, 40% discount to the peak and this is where a lot of money is coming into this sector. That will actually bring up valuations, because there’s competition, and also [help the] recovery of the private market, but the REIT market is a separate issue… My prediction is the REIT market will recover faster than the direct market because it is liquid.”
APAC REITs grow to US$430 bil
Year to date, Asia-Pacific (APAC) REIT IPOs have raised US$7.6 billion; more than half of capital raised were for C-REITs listings.
According to Aprea-compiled data, several REIT markets in the region are delivering double-digit returns, including Australia (18.2%), Japan (20.5%) and Singapore (14.7%). Hong Kong emerged as the top performer with 25.4% returns year till September.
In comparison, US REITs have lagged most of the region with a modest 4.6% return over the same period.
The APAC REIT market now boasts a combined market capitalisation exceeding US$430 billion.
In April 2024, the CSRC proposed to expand the Shanghai- and Shenzhen-Hong Kong Stock Connect initiative to include Hong Kong and China-listed REITs, without sharing a timeline.
According to Aprea, this will “greatly expand” the investor base and trading liquidity of REITs listed in both economies, which will “unlock their full potential”.
Meanwhile, the reclassification of REITs as equity instruments in India will similarly boost trading liquidity of REITs in the country, reads an Oct 9 press release by Aprea. The move, which allows mutual funds to invest higher proportions in REITs within equity mandates, will encourage institutional and foreign investments into the country’s REITs. It also sets the stage for index inclusion, which will boost the profile of Indian REITs.
Aprea CEO Zialcita says these policies will entrench the region’s REITs into a mainstream asset class. “As regulatory frameworks evolve and investor education deepens, the APAC REIT market is poised to expand, supported by regulatory changes and long-term structural trends, cementing its role as a vital component in the global real estate investment landscape.”
Photos and infographics: Aprea
