- China REITs add a compelling dimension to
the real assets sector in the region.
- Enabling the sustainable financing of
these massive projects will spur the development of new financing vehicles
and foster the development of infrastructure as an asset class.
NEW DELHI,
INDIA - Media OutReach - 16 June
2021 - China's highly anticipated REIT pilot program finally came to fruition
this week, with the launch of the retail tranches of its first nine REITs all
oversubscribed on its first day. China REITs are currently only backed by
infrastructure assets packaged in a mutual fund structure, deliberately picked
by authorities to spearhead the country's recovery from the pandemic.
Together
with China, there are an estimated 28 infrastructure-backed offerings
securitized in various structures listed across the region currently, with a
market cap of close to US$80 billion. While this is dwarfed when seen in
relation to the value of its infrastructure investments, momentum is building.
The
offering in the region's largest economy adds a compelling dimension to the
real assets sector in the region. Given the sheer size of China's
infrastructure market, its pilot programme for REITs is a prelude to a market
that could eventually rival that of the US. According to S&P, the
securitization of just 1% of such assets implies an over US$2 billion market.
India's infrastructure investment trust market is also expected to expand to
over US$100 billion in the next five years, according to CRISIL Ratings.
Country
|
Market
Capitalization (US$billion)
|
Australia
|
63.0
|
China
|
4.9
|
India
|
3.2
|
Japan
|
1.5
|
Singapore
|
6.9
|
Source:
APREA
Note: Data as of 1 June 2021
As
countries look to bounce back rapidly from the pandemic-induced recession,
governments are placing infrastructure-led investments high on the stimulus
agenda. Infrastructure
spending has long been viewed as a powerful lever that governments can pull to stimulate
the economy. Supranational
bodies like the
International Monetary Fund have also weighed in, noting that current low
interest rates is a window of opportunity that should be seized upon.
"Infrastructure
investments form a crucial part of this equation, to fast track the region's
recovery from the pandemic and secure its economic future," observed Sigrid Zialcita, CEO of
APREA.
The Asian
Development Bank estimates that the region will need to invest $26 trillion
from 2016 to 2030 if the region is to maintain its growth momentum, eradicate
poverty and respond to climate change – that works out to US$1.7 trillion a
year to the end of the decade. Currently, only about US$900 billion are
estimated to be invested annually. This yields a financing gap of close to US$1 trillion a year to the end
of the decade.
Given the
substantial outlays involved, the requirements are unlikely to be met by traditional sources of
banking. Public
budgets, already stretched by fiscal responses to the pandemic, will also be
limited. This entails new financing bases –
from asset recycling or monetization strategies, private equity and
private-public partnerships – to drive repeated rounds of infrastructure
investment by tapping on institutional capital and the mobilization of retail
savings.
Enabling
the sustainable financing of these massive projects will gain traction and
foster the development of infrastructure as an asset class. For example, infrastructure trusts, like REITs,
provide a long-term source of capital that funds development cycles, catalyzing
urbanization through which a country's economy can be elevated.
"Infrastructure
trusts can form a critical layer in the capital stack for financing
infrastructure developments in the region. Not only will it enable developers
to recycle capital, the vehicle can also form an effective exit strategy for
infrastructure funds in the region," noted Miss Zialcita.
With the
pandemic exerting some urgency, there is now growing expectations that infrastructure financing volumes
in the region will surge.
It is not only because of the considerable multiplier effects that such massive
investments generate, it is also the groundwork it lays for future economic
growth. As the focus
increasingly turns from containment to longer-term recovery, countries will be keen to ride on
the anticipated post-pandemic economic boom which a synchronous global recovery
will drive.
"The
region's largest economies are pivoting to infrastructure investments in a big
way. We see this as an
acceleration of the securitization trend in infrastructure and the pent-up
demand for industry players eager to tap into its potential. Aside from the
oft-mentioned fast-tracking of digital trends and e-commerce, the pandemic has also been game changing in hastening the securitization
movement in the region," Miss Zialcita noted.
Investors
are also turning bullish over the long-term fundamentals of the sector. Global
investment firm KKR just closed this year its first Asia Pacific fund at US$3.9
billion to become the largest pan-regional infrastructure fund in the region.
While the lack of investment grade projects available remain an obstacle for
now, development is expected to accelerate.
"As an
asset class, infrastructure is inherently less susceptible to economic cycles,
delivering diversification benefits in addition to a predictable long-term
stream of income. With the requirements needed by the rapidly developing
economies in a region that could eventually host more than half of the world's
megacities, investments into the very assets so critical in driving its growth is a trend that will be played out over decades," said Miss Zialcita.
By 2030,
seven of the world's 10 largest megacities will be in the Asia Pacific. The
region's urban population will expand by close to three billion. The region
remains a hot bed of construction activity and as its cities continue to grow,
the fundamental demand for real estate and infrastructure will increase in
tandem. Plans to integrate the region's
economies through infrastructure diplomacy programs will also fuel the
development boom.
Anticipating
the enormous implications of these megatrends, APREA rebranded recently to expand its reach to include
infrastructure investments in its mandate. The benefits of investing in institutionalized
assets will be more evident as the world inches towards a post-pandemic future
and the securitization of the very assets so critical in driving its growth
will be a massive investment opportunity.
"The region remains primed to take
advantage of this revolution in real assets. APREA's goal is to pave the way for the expansion of
investment opportunities in the region and catalyse the rise of Asia Pacific's
infrastructure asset class," Miss Zialcita added.
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