REITs will redefine the Xinjiang boundary of asset management industry.

On April 30th, 2020, the China Securities Regulatory Commission and the National Development and Reform Commission issued the Notice on Promoting the Pilot Work of Real Estate Investment Trust Funds (REITs) in Infrastructure (hereinafter referred to as the Notice), and officially launched the long-awaited public offering REITs pilot. At the beginning of August, China Securities Regulatory Commission issued and implemented the "Guidelines for Public Offering of Infrastructure Securities Investment Funds (Trial)", which marked the start of public offering of REITs in infrastructure field. The construction of public offering REITs market is an important part of China's financial supply-side reform and factor market allocation, which is of great significance to infrastructure construction and asset management market development.

New impetus of financial supply-side reform

Introduce a market-oriented operation mechanism as an "integrator" of local state-owned assets. After more than 70 years of economic construction, China is in the stage of rapid development of new industrialization, informationization, urbanization and agricultural modernization, and the demand for infrastructure construction and investment is huge. At present, a considerable number of various types of infrastructure have been built, which play an important role in the fields of transportation, energy and municipal administration, and have the foundation and conditions to carry out infrastructure REITs pilot work. By the end of 20 19, the accumulated investment in urban infrastructure in China reached 150.3 trillion yuan, and the main sources of funds were financial expenditure, bank debt and self-raised funds. The capital provided by the capital market is extremely limited and the securitization rate is very low. REITs will become a sharp weapon to effectively integrate the operation of state-owned assets and local government capital. On the one hand, infrastructure REITs will introduce professional operators or strategic partners and a relatively market-oriented operation mechanism, and at the same time, with the help of the capital market to acquire and merge high-quality similar local state-owned assets to achieve large-scale, intensive and professional operation, which can effectively improve the operational efficiency of infrastructure; On the other hand, infrastructure REITs can improve the system and mechanism of market allocation of land, labor, capital, technology and data, create favorable conditions and good environment for the effective integration of state-owned assets in the process of infrastructure construction, optimize the organizational form and management mode of infrastructure projects, and improve the quality of infrastructure supply. In addition, infrastructure REITs will further improve the investment and financing system of local state-owned assets, provide alternative and more flexible exit methods for social capital, attract more social capital to participate in infrastructure construction, and enable ordinary investors to enjoy the benefits of infrastructure investment.

Provide a "pressure reducer" for solving local government debts from the perspective of assets. The macro leverage ratio is usually measured by debt /GDP internationally, but the debt/asset ratio is usually used to measure the leverage ratio in micro-research. This difference between macro and micro calculation caliber may be mainly caused by two factors: first, for economies, debt data are easy to obtain, and asset data statistics are quite difficult, especially for a country's asset data based on market value; Second, for the free market system, almost all government deficit expenditures are consumer expenditures, such as medical care, education, welfare and national defense expenditures, and less capital expenditures lead to the formation of effective assets. Different from foreign countries, local governments in China have formed a large number of state-owned assets through debt investment, which provides feasibility for improving the overall welfare of society. Therefore, it is more scientific to measure local debt risk with debt/asset indicators, and financial management can extend from the traditional debt end to the asset end.

Based on macro-statistics, it can be analyzed that China's government debt is mainly used for fixed assets investment. From 2003 to 20 17, the national electricity, heat, gas and water production and supply industries, transportation, warehousing and postal services, and infrastructure construction have completed an investment of 172.32 trillion yuan, forming a large number of fixed assets. The debt /GDP index only considers the debt side and does not consider the asset side. It is not comprehensive to use this index to investigate the debt risk of local governments in China. In addition to general fiscal revenue, asset income or asset sales income can also be used to repay debts. It is obviously better to have a high leverage ratio but a lot of assets on the balance sheet than to have a low leverage ratio but almost no assets on the balance sheet. Asset-liability relationship with asset-side information is a more critical perspective to analyze debt problems. Infrastructure REITs only transform a large number of infrastructure assets deposited in China into transparent, standardized and tradable REITs products, thus improving the liquidity of existing assets and revitalizing existing assets. The financial management of local governments can extend from the debt side to the asset side, integrate and effectively revitalize the existing assets of local governments, optimize management methods, reduce macro leverage ratio, ease the financial pressure of local governments and resolve local debt risks.

Relying on the asset management industry to provide a "booster" for economic transformation and upgrading. At present, the development of China is still in a period of strategic opportunities. Looking inward, China's economy has entered a stage of high-quality development, with many advantages and conditions, but it also faces difficulties and challenges brought about by the interweaving of structural, institutional and cyclical problems. Looking outward, the international environment is becoming increasingly complex, and instability and uncertainty have improved significantly. In the second quarter, China's GDP growth rate reached 3.2%, 1 1.5%. With the resumption of production of the whole industrial chain, the supply side has obviously picked up and domestic demand has gradually picked up. On July 30th, the meeting of the Political Bureau of the Communist Party of China emphasized that we should understand it from the perspective of protracted war and accelerate the formation of a new development pattern with domestic macro-cycle as the main body and domestic and international dual-cycle promoting each other.

From the perspective of infrastructure, the space for improving infrastructure capacity through business upgrading has gradually become cramped and narrow. However, through REITs, the asset management industry based on the capital market will inject a new booster into the infrastructure industry and will also have a significant impact on the asset management industry. REITs will not change the consumption cycle of infrastructure, but will shorten the purchase cycle of infrastructure, and the traditional mortgage repayment model based on service charges will be completely changed. Through REITs, we can improve the turnover speed of infrastructure industry and endow it with the property of commodity capital. The government or other infrastructure investment can pay off the investment funds in a short time by issuing REITs, which is far below the service life of infrastructure. Shortening the purchase period enables the purchaser to use the remaining funds to engage in high-yield investment activities, including other capital expenditures or financial investments, thus further promoting the degree of REITs and financialization of infrastructure, enhancing the enthusiasm of all participants in the entire asset management format, and even changing the traditional operation mode of government agencies and state-owned enterprises, bringing them into the torrent of the new era of asset management.

It is highly compatible with the development needs of China asset management industry.

Developing infrastructure REITs can not only effectively revitalize the stock assets of local governments, form a benign investment cycle, further increase the proportion of direct financing and reduce the macro leverage ratio; It can also expand new investment fields, as a new asset allocation category other than stocks, bonds and cash, provide investors with long-term investment tools with high return-risk ratio, large portfolio diversification value and good liquidity, and provide high-quality assets for residents' property income. Judging from the current situation and problems of China's asset management market, the introduction of infrastructure REITs is highly in line with the actual needs of China's asset management industry.

Since the second half of 20 12, with the introduction of various new asset management policies, bank wealth management departments, trust companies, insurance asset management institutions, brokerage asset management institutions and fund subsidiaries have poured into the asset management market, and China has ushered in the era of "big asset management". By the end of 20 19, according to the author's data, the scale of China's asset management industry exceeded 1 10 trillion yuan. Among them, the scale of Public Offering of Fund is about/kloc-0.5 trillion yuan, private equity funds (including brokerage asset management, fund subsidiary accounts, fund company accounts and private equity fund manager products) are about 33 trillion yuan, bank wealth management products are about 22 trillion yuan, trust products are about 22 trillion yuan, and insurance asset management is/kloc-0.8 trillion yuan.

The inclusiveness of the asset management industry needs to be further improved. Although the development of China's asset management market has made outstanding achievements in quantity, there is still much room for improvement in inclusiveness. First of all, although the total wealth is increasing, the service scope of the asset management industry is still not wide enough, and there is a lack of products with medium risk and medium income, resulting in a considerable part of asset management business still focusing on service institutions and a few high-net-worth people. Secondly, since the reform and opening up 40 years ago, many high-quality infrastructure assets have been deposited, but there is a lack of means and tools to distribute the proceeds to investors. Although a certain amount of infrastructure has been held by the public through listing, it is difficult to really benefit residents because of the constraints of the capital market or the legal and policy environment itself. China's asset management industry should pay attention to low-and middle-income people, provide more valuable and abundant products and services, and help all social groups with financial investment needs to make appropriate and effective financial investments at affordable costs from the perspective of financial inclusion, which is conducive to further transforming residents' savings into investments and enabling ordinary individual investors to enjoy the dividends of national development.

The risk-return benchmark of asset management still lacks anchor coordinates. China's asset management market lacks a sound risk pricing mechanism, and the market needs more products with symmetrical risk-return characteristics and highly transparent information. In the past few years, under the premise of explicit and implicit exchange, the only thing that asset management products can attract investors is the rate of return. In order to pursue high-yield requirements, institutions must allocate high-yield assets, but high-quality high-yield assets are always scarce, so they have to adopt the strategy of maturity mismatch or reducing the credit qualification of assets, which is an important reason for the asymmetry of product risk and income and low transparency. The lack of anchor products in the capital market will limit the further development of the asset management industry. At present, with the cultivation and development of professional investors, the asset management industry needs a more perfect risk pricing mechanism, balancing the asset side and the liability side, the supply side and the demand side, and providing the market with high-quality asset management services and products with rich maturity, flexible structure and diversified strategies by strengthening the matching of risks and returns.

Blind spots still exist in the asset management industry, and the breadth needs to be further improved. The asset allocation capabilities of various asset management institutions are mixed, and the phenomenon of product homogenization is still very obvious. Specifically, the investment scope of products is relatively narrow, the investment strategies and styles imitate each other, and the basic assets are highly coincident in types. China's financial market needs to be further improved, and there is still a lack of basic financial products in the market, especially assets related to important risk sources, especially financial products linked to the largest category of "bulk assets" real estate. From the perspective of capital allocation, real estate investment is the main competitor of traditional asset management industry. Without real estate-related financial products, the asset management industry will also lose capital groups with special needs for real estate allocation.

This will bring four major changes to the asset management industry in China.

How to improve the property income of a wider range of people through effective asset management requires that the capital market can provide a variety of high-quality financial products and form a differentiated and complete product line, which can better match the risk preferences of different investors and meet the income and liquidity needs. No matter for individual investors or institutional investors, there is a lack of standardized, high-quality and highly liquid financial products that match the risks and benefits of real estate assets. The pilot of public offering REITs is of great significance to the further development of China's asset management industry.

First of all, public offering of REITs is an important embodiment of optimizing asset allocation and effective investment choice under the efficient frontier theory, which will effectively fill the product gap in China asset management market. On the one hand, the low correlation between real estate assets, infrastructure assets and other financial assets is conducive to the diversification and decentralized allocation of assets; On the other hand, the real estate industry is an important part of national economic development. Relying on the value-added property of land is an important asset class to fight inflation and has important allocation value. However, the income and wealth level of individual investors are high, which is difficult to meet the needs of portfolio diversification and asset allocation optimization, and does not have the characteristics of inclusiveness. For institutional investors, the target proportion of real estate allocation is increasing year by year. Infrastructure REITs can effectively fill the product gap in China asset management market and provide convenient channels for all kinds of investors to participate in infrastructure and real estate market investment. Relying on professional asset management and operation mode, it can help investors to realize cross-period, cross-regional and cross-industry decentralized asset allocation, effectively help the frontier of portfolio to extend outward, and can well meet the investment demand of pension, social security fund and residents' wealth management fund for real estate. Generally speaking, the development of REITs market will be of revolutionary significance to the development of the entire capital market and asset management industry.

Secondly, the public offering of REITs products can improve the savings characteristics of asset management business and provide investors with standardized products with stable cash flow, symmetrical risk and return, good liquidity and high transparency. Through the market function of REITs, it is helpful to realize the saving function of asset management business and to transform savings into investment. The characteristics of high dividends and stability of REITs are helpful to introduce funds pursuing certain returns into the REITs market. At the same time, the liquidity characteristics of REITs enable holders to obtain liquidity with REITs share at any time and engage in other high-yield financial investment behaviors. Especially for financial management methods with savings characteristics, such as fixed investment, REITs will change the original operation mode and realize the unity of safety, liquidity and value-added.

Third, the pilot of publicly offering REITs products will help the asset management industry return to its original source. The healthy development of China's capital market depends on protecting and coordinating the interests of all participants, and avoiding moral hazard and agency problems while providing incentives for managers. REITs system provides an important governance mechanism for asset management industry. On the one hand, the value creation of REITs is based on the real operation of real estate assets, which makes the core of REITs pricing lies in evaluating the long-term stable dividends of assets and improving the operation level to enhance the asset appreciation ability; Reducing the influence of moral hazard on pricing is helpful to the healthy development of asset pricing in asset management market. On the other hand, REITs adopt the compulsory dividend system, which greatly reduces the disposable free cash flow of REITs, makes the expansion of REITs depend on external financing or asset circulation, and inhibits the expansion impulse of managers based on their own interests.

Fourthly, the trial of public offering of REITs may promote the asset management market to become a new driving force and engine for China's economic growth. First, the REITs pilot project in Public Offering of Fund improved the problem of "idling" of monetary funds through the precise docking of financing and investment, and consolidated the function of the capital market in serving the real economy. Building a "bridge" through REITs will drive social capital to participate in infrastructure construction, and further guide the monetary funds entering the capital market to change from the "internal circulation" of financial asset management tools to the "external circulation" mode of asset management serving the real economy, effectively reducing the financing cost of the real economy and improving the profit rate of the real economy. Second, by enriching the asset management product system, Public Offering of Fund REITs effectively expanded the regulatory boundary of investment and financing activities, created a good capital market environment for economic development, strengthened the policy transmission function and risk prevention and resolution function of the capital market, and promoted a virtuous circle between finance and the real economy. Thirdly, the REITs pilot project in Public Offering of Fund will also promote the further improvement and optimization of local state-owned assets management, land, finance, taxation, investment and legislation. With the help of public offering REITs to develop new machines and open a new bureau of infrastructure construction, it will also effectively promote the real economy to be stable and far-reaching and usher in greater development.

Three problems that should be paid attention to in the pilot project of public offering REITs

Based on the uniqueness and importance of public offering REITs, it is difficult to fully deconstruct the whole picture of REITs in any single dimension from the perspective of investors, managers and industries, and it is difficult to really do REITs well only by considering a single dimension. However, from the perspective of the asset management industry as a whole, the author suggests focusing on three issues in the pilot process:

REITs active management and passive management. Judging from the practice of global equity REITs, the active management mode, which is good at asset operation management and creatively improves its property return, is of course a major product operation mode. However, just as stock funds are divided into active management and passive management, passive management REITs are more common in overseas markets, and their management fees are often relatively low, aiming at providing investors with an opportunity to participate in large-scale property investment and also providing a bridge between the original rights holders and the capital market. This product type is more common in Hong Kong REITs and Singapore REITs.

Whether active management mode or passive management mode, the REITs products of these two modes are not strictly orthodox or sideline, but depend on the management regulations and industry characteristics of different capital markets. As far as the pilot project of public offering of REITs for infrastructure in the Mainland is concerned, firstly, based on the financing demand of "reducing leverage and stabilizing growth" in the Mainland, REITs with external management mode are more conducive to maximizing financial returns and financing equity funds without losing control, but are not conducive to bringing infrastructure operators into REITs products as a whole, and then REITs products are more used as a platform for docking the capital market. Secondly, whether for infrastructure assets or real estate assets, active operation itself is a double-edged sword. Admittedly, we can't understand the operation, but too much emphasis on related functions will introduce more elements involving "operation" and weaken the "transparent" advantage of real estate investment.

In this regard, REITs themselves should not give up the biggest advantage based on "assets". Only the immortal property of the asset itself can create a century-old variety, so an excellent REITs product should be positioned as a "passive product of active management". Active management here is not centered on operation, but managers should focus on investment judgment, price negotiation, operation supervision and timing trading of high-quality assets, and even divest operations to the maximum extent during the pilot period.

Reasonable pricing means that REITs are half successful. Reasonable market pricing is the premise of giving full play to the role of REITs in market resource allocation. In the pilot, the asset management industry will play a vital role in the pricing of real estate investment trusts. Establishing a pricing concept that conforms to the essence of real estate business logic in the asset management industry will play a vital role in establishing a sound market pricing mechanism, enhancing the information effectiveness of the REITs market, curbing speculation in the REITs market, and making the REITs price the "anchor" of real estate asset pricing, which is also an objective requirement for the construction of the REITs market in China. In the short term, we should strengthen the pricing concept and pricing expectation management of REITs in asset management industry. In the long run, we should increase the ability of asset management institutions to manage, operate and invest in infrastructure assets, strengthen the transparency of investment in REITs in asset management industry, strengthen the information disclosure of REITs, further improve the valuation standard system, and gradually establish a set of scientific management, operation and open and transparent valuation trading mechanism in the whole market.

Weighing the same demands of industrial capital and financial capital is the long-term way to improve the governance ability of REITs. The long-term healthy development of China real estate investment trust market depends on whether it can become an open, transparent and effective market, protect and coordinate the interests of stakeholders, and create value for investors, promoters and managers. The management of REITs is professional management and active management, which have both financial and real estate attributes, and are two different asset management capabilities. The value of REITs depends on the professional management and rational investment decision of managers, and the incentive compatibility among investors, industrial capital and managers is the premise of improving asset management ability, that is, the governance of REITs. The governance problem of REITs stems from the agency problem under the conditions of information asymmetry and interest conflict, and also from the different interest demands of industrial capital and financial capital. The agency problem of REITs mainly includes two kinds: one is caused by the conflict of interest between sponsors (industry parties) and public investors, and the other is caused by the conflict of interest between investors and managers. Reducing the agency cost caused by agency problems is the goal of REITs governance mechanism. How to balance the interests of industry and finance and seek the greatest common denominator is the long-term way to improve the governance mechanism of REITs. The author believes that through proper market construction and guidance, encouraging the cultivation of a number of REITs fund management institutions with mature financial and real estate investment concepts and encouraging the moderate combination of financial institutions and real estate industry groups may be the development direction of current domestic practice.

Although the construction of REITs market in China started from scratch, it is not a picture on a blank sheet of paper. Under the existing system, it is necessary to consider the trade-offs of economic growth, high-quality development, financial risk management and other aspects, involving the coordination with local government behavior patterns, real estate policies and financial policies, and its complexity is self-evident. The market construction of public offering REITs in China will not be completed overnight, but "a journey of a thousand miles begins with a single step". We should not only look at the related problems of REITs market construction rationally and scientifically, but also focus on long-term and long-term achievements. The pilot launch of infrastructure REITs is a breakthrough. With the smooth progress of the pilot work, with the joint efforts of policy, academia and all walks of life in the industry, we are confident to usher in the long-term healthy development of China REITs market. With the gradual improvement of REITs market, the asset management industry will also expand to a new frontier.