To help investors better understand the valuation principles behind real estate investment trust (REIT) projects based on toll roads, Shanghai Stock Exchange recently hosted the "REITs Investment Talk" event to discuss the investment value of REITs. Esteemed industry experts from securities companies, public funds, and insurance companies attended the event, along with nearly 100 researchers, investment managers, and other front-line investment professionals joining offline. The event garnered close to 10,000 online views.
At the event, three industry experts shared their insights on current REITs investment values, toll road REITs valuation and its investment logic from the perspectives of investment research and duration management. The speakers were Pei Jiamin, an analyst from the Research Department of China International Capital Corporation Limited (CICC); Zhang Ruoran, Executive Director of the REITs Investment Department at Gfund Management Co., Ltd. (Gfund); and Jiang Mengjie, Head of Real Estate Investment in the Asset Management Department at Aegon THTF Life Insurance. The discussions focused on market hotspots including the current investment value of REITs and the valuation of toll road REITs projects. The experts agreed that the REITs market has performed well this year and overall valuations remain within a reasonable range. Specifically, they noted that toll road REITs still have a relatively low valuation, making it suitable for those seeking a stable investment.
REITs Market Recovery Progresses with Reasonable Valuations
According to public data, since the second quarter of this year, the overall performance of the REITs market has surpassed that of other major asset classes. From the beginning of the year until August 23, the CSI REITs Total Return Index rose by nearly 11.38%, and the average turnover rate of REITs in the past month was close to 1%, indicating a clear trend of market recovery and increased trading activity.
Pei Jiamin from CICC commented that the REITs market underwent a complete market cycle since 2022, resulting in improving resilience in market mechanism. The overall market has gained momentum this year particularly. Judging from the distribution yield, a popular indicator investors look at, the market value-weighted available-for-distribution yield of equity REITs (REITs with ownership of underlying assets) is 4.62%, while the dividend yield of the CSI Dividend Index during the same period is 5.13%. Additionally, the market value-weighted internal rate of return (IRR) of managerial REITs (REITs which generate income from toll roads, utility franchises, etc. without holding underlying assets) is 6.52%, showing a spread of approximately 430 basis points with the yield to maturity of the ChinaBond 10-year government bond. Overall, the valuation range is considered reasonable.
Toll Road REITs Show Stablized Valuation and Investment Opportunities
In the toll road sector, valuations of some expressway REITs have gradually stabilized after a period of market adjustments. The high proportion of mandatory dividends in REITs makes them a well-suited target for stable investment.
Jiang Mengjie from Aegon THTF Life Insurance noted that expressway REITs had experienced a downward pressure in valuation over the past year due to factors such as underwhelming performance and sector rotation. However, based on the secondary market performance over the past month, the fundamentals have largely stabilized and there is limited downward risk in valuation. On performance side, the third quarter is typically a peak season for expressways, which may show significant improvement compared to the first half of the year. In addition, the top 3 constituents of the real-time CSI REITs Total Return Index are toll road REITs, indicating a stronger investment inflow potential if index products are launched later on. These factors are likely to support a rise in price of toll road REITs, showing greater investment opportunities of the sector.
Reconciliation in Return Calculation may Improve Valuation Comparability among Toll Road REITs
Valuation of toll road REITs is a key indicator to investors. Zhang Ruoran from Gfund shared his insights in this regard. In practice, making comparisons among valuations of different REITs projects can be challenging due to varying expectations and differences between amortized principal repayments and dividend payments, regardless of whether IRR or cash distribution yield is used. This can be addressed by adjusting valuation indicators such as price to net asset value ratio (P/NAV) and IRR. For instance, NAV can be adjusted by multiplying it by the average completion rate, while each completion rate is measured by the percentage of actual operating income each year to the predicted operating income at the time of the project's initial launch. IRR can be calculated based on the data disclosed in the latest period assuming no growth in income throughout the project cycle. These adjustments can effectively reduce the impact from confounding factors on income calculations, making indicators more comparable across different projects.
This event is the third "Investment Talk" held this year, which has played a positive role to align recognition with REITs investment value and foster an ecosystem featuring smooth interaction and mutual trust between investors and financiers. With the release of the Notice on Comprehensively Promoting the Normalized Issuance of Real Estate Investment Trusts (REITs) Projects in the Infrastructure Sector by National Development and Reform Commission, regular REITs issuance has marked a surge in number. So far this year, 12 REITs have been listed across the market, 9 of them listed on Shanghai Stock Exchange. A wider variety of underlying assets such as consumer infrastructure, hydropower, and onshore wind power are newly incorporated. The scale effect of REITs continues to play out.
The above information is provided for reference purposes only and does not constitute investment advice.
