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Tuchong Creative/Photos provided by Wang Yunpeng/Table created by Chen Jinxing/Chart created by

Securities Times reporter Wang Xiaoqian

As the secondary market for REITs (real estate investment trusts) continues to rebound, "fund buyers" FOF (funds of funds) are focusing on this type of asset.

The second quarterly report of the fund shows that Penghua Qianhai Vanke REITs, Hongtu Innovation Shenzhen Anju REIT and Huaxia Beijing Affordable Housing REIT have all appeared in the fund's heavy holdings list. Industry insiders believe that this trend not only reflects the public offering FOF's pursuit of asset diversification and income stability, but also reflects the market's wide recognition of REITs as an emerging asset class.

Public Fund Offering

Falling in love with REITs

In recent years, as the market has entered a low-interest rate era, it has become increasingly common for public FOFs to include public REITs in their investment portfolios.

The second quarterly report of public offerings shows that three REITs have entered the ranks of public offering funds' heavy holdings. Penghua Qianhai Vanke REITs are the third and ninth largest holdings of Xingquan Antai Active Retirement Target Five Years and Jianxin Tianfu Leisurely Steady Retirement Target One Year, respectively. The two funds hold a total of 55.7 million yuan. Hongtu Innovation Shenzhen Anju REIT and Huaxia Beijing Affordable Housing REIT are also held heavily by Tianhong Ruixiang for three months.

From the perspective of market performance, as of August 16, the Hua Xia Beijing Affordable Housing REIT has increased by 34.50% this year, ranking first among REITs funds; Hongtu Innovation Shenzhen Anju REIT has also increased by 26.63% this year.

The reason why public REITs have quickly emerged in public FOFs is closely related to their unique advantages in a low-interest rate environment. Wang Zhipeng, fund manager of Jianxin Fund, told the Securities Times reporter that as the market enters a low-interest rate era, public REITs, based on the transparency of underlying assets and the ability to create stable distributable cash flows, have gradually shown cost-effectiveness in the allocation of major asset classes. He further emphasized that public REITs can not only provide relatively stable dividend income, but also have considerable long-term compound returns. "Public REITs have low correlation with other financial assets, good risk diversification effect, and high allocation value."

Data from the Tianxiang Investment Consulting Fund Evaluation Center shows that the allocation scale of public FOFs in REITs has been growing since the second half of 2023. Among them, Penghua Qianhai Vanke REITs has a large share of public holdings, and the market value of holdings has surged from 7.5 million yuan at the end of 2022 to 88.33 million yuan at the end of 2023, reflecting the growing interest of public FOFs in REITs investment.

In addition, policy support has also paved the way for the widespread allocation of public REITs in FOF. Sang Lei, fund manager of China Europe Fund, said in an interview with reporters that the "Notice on Comprehensively Promoting the Regular Issuance of Real Estate Investment Trust Funds (REITs) Projects in the Infrastructure Field" issued by the National Development and Reform Commission has made the market expect a faster issuance speed and a larger market scale in the future, which has greatly promoted the development of the REITs market.

Sang Lei further explained that according to the contract, ordinary FOFs can only invest in investment targets that have been established for more than one year, and pension FOFs can only invest in investment targets that have been established for more than two years, so the number of investable targets is gradually increasing. With the listing of more REITs projects, the investment scope of public FOFs has also been expanded. As of the end of June 2024, there were 28 REITs projects in the market that had been established for one year and 12 REITs projects that had been established for two years. The gradual increase in these targets provides more options for FOF asset allocation.

Major asset allocation

REITs are needed

As more and more public FOFs include public REITs in their investment portfolios, the market has shown great concern about the advantages of this asset allocation method in terms of return stability and risk control, and the unique role of REITs in the allocation of major asset classes is gradually emerging.

Stable dividend income is one of the important reasons why public REITs are favored by investors. Wang Zhipeng believes that public REITs can provide relatively stable dividend income, and the long-term compound return is considerable. Tianxiang Investment Consulting supports this view. Under the premise of meeting the dividend conditions, the dividend income of REITs is usually distributed at least once a year, and the annual fund income distribution ratio is not less than 90% of the annual distributable profit. This stable income characteristic makes REITs an ideal choice for public FOFs pursuing stable income.

In addition to the stability of returns, the risk diversification effect of REITs is also one of the factors that public FOFs value. Yanni, a senior fund researcher, particularly emphasized this point. In her opinion, one of the selling points of FOF is asset allocation, and the core of asset allocation is to find assets with the lowest possible correlation for combination. "REITs are a typical alternative asset with low correlation with stocks and bonds, and play an important role in the allocation of major asset classes. In many markets such as the United States, Singapore, and Japan, the scale of REITs development is quite considerable. REITs, like gold and commodities, are an asset class that multi-asset investors must take into consideration."

Yanni said that due to the high correlation between REITs and real industries, public fund managers often need to have a deep understanding of the nature of the underlying assets and the market environment when allocating REITs. Research on REITs is difficult, involving some specific industries and business models, and the situation is complicated, requiring relatively professional research support. REITs fund managers are usually introduced from other industries and need to understand real estate investment trusts. Some research involves specific assets such as highways, warehousing and logistics, ports, affordable rental housing, and commercial real estate.

At present, driven by both the market and policies, the FOF research framework within each public fund is rapidly improving. Sang Lei told the Securities Times reporter that since the first batch of public FOFs included REITs in their investment scope in July 2023, fund companies have accelerated their research and investment in REITs. In his view, REITs are an emerging asset type, and each public FOF must invest a lot of time and manpower to build an internal research framework and evaluation system to ensure that it takes the initiative in investment.

Limited short-term impact

As public FOFs gradually increase their allocation to REITs, the market has begun to pay more attention to the long-term prospects of this asset allocation. At the same time, industry insiders believe that FOFs' active holdings also have a positive impact on the development of REITs.

Many interviewees agreed that the allocation ratio of REITs in public FOFs is expected to continue to increase and become one of the mainstream allocations in the future. Wang Zhipeng believes that REITs may become an important allocation asset of public FOFs in the future, mainly for three reasons: First, allocating REITs helps to improve the cost-effectiveness of public FOFs. From the perspective of asset allocation, adding public REITs to traditional stock and bond portfolios can effectively increase returns or reduce risks, and the Sharpe ratio of the portfolio can be improved; second, in the era of low interest rates, the cash distribution rate of public REITs is high, predictable, and relatively scarce; third, some public REITs have high-quality operating management institutions and high-quality underlying assets, and their cash flow is expected to continue to grow in the future, which has anti-inflation properties. "

Sang Lei said that due to the difficulty of researching and investing in REITs projects, individual investors often find it difficult to directly participate in them, while public FOFs can help individual investors share the economic benefits of high-quality stock infrastructure through their professional research and investment capabilities. In addition, the allocation of public FOFs to REITs is conducive to attracting the attention of other institutional investors and public investors to REITs assets through public channels. The more participants in the REITs market, the more conducive it is to the construction of the REITs market pricing system.

Public FOFs have increased their allocation to REITs, which not only improves their own income stability, but also has a positive impact on the development of the REITs market. Wang Zhipeng pointed out that the duration of public REITs is generally long, and the buying and selling behavior of public FOFs in the secondary market has injected new vitality and capital flow into the REITs market, expanded the market participant base, and improved the market's liquidity and depth.

Yanni has a different view. She believes that the focus of public FOFs will have a certain promoting effect on the REITs market, but the impact will not be significant in the short and medium term. In her opinion, the overall scale of FOFs is relatively small, and the allocation to REITs is also relatively limited, so it is difficult to have a significant driving effect on the REITs market.