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The View | Chinese Reits are a minnow in the Asia-Pacific, but should not be underestimated
- The bleak global backdrop may not seem to bode well for the development of China’s Reit market
- However, starting with low-risk infrastructure – at a time when critical assets such as logistics properties are in demand – puts the market on the right track
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In financial markets, the question on every investor’s lips following the dramatic collapse of Silicon Valley Bank, formerly the US’ 16th largest bank, is: what is the next shoe to drop? While attention is focused on vulnerabilities in the banking sector, commercial real estate has been under scrutiny for some time.
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The office sector is causing the most concern due to the toxic combination of the sharp rise in interest rates, stretched corporate balance sheets that limit tenants’ ability to pay more rent and, crucially, the pandemic-induced shift to hybrid working, especially in the United States.
Grade B offices – lower quality and poorly located buildings that have poor sustainability credentials and are ill-suited to the post-Covid world – and indeed many grade A offices are most at risk.
In a sign of the severity of the deterioration in sentiment towards commercial property, an index of US office-focused real estate investment trusts (Reits) has lost a staggering 50 per cent over the past year, leaving it at its lowest level since early 2010. With traditional commercial real estate – offices and retail properties – accounting for nearly 30 per cent of the benchmark S&P Global Reit index, it is not surprising the gauge is down 28 per cent since the end of 2021.
Given such a bleak global backdrop, this may seem like an inopportune time for China to be pushing ahead with the development of its fledgling Reit market.
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A minnow in the Asia-Pacific region – Japan, Australia and Singapore have a combined weighting of almost 90 per cent in the S&P Asia Pacific Reit index – China only launched its first batch of publicly traded Reits in June 2021. They have since grown to 25 with a market capitalisation of US$12.6 billion, compared with 204 in the US with a total value of US$1.2 trillion.
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