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Since the beginning of this year, the continued weakness of the A-share market has greatly hit investor confidence. Even the high-dividend concept that performed relatively well in the early stage has fallen recently. However, REITs assets with similar characteristics still show strong resistance to decline. As of August 19, the CSI REITs Total Return Index has a year-to-date return of more than 12%. Whether compared with the CSI 300 or the China Bond Index, the excess return is very significant.

In the article "100% interest income, more than 12% increase this year, 90% probability of making money, this type of asset is still a blue ocean in China!", we briefly introduced the necessity of asset allocation such as REITs, as well as some basic characteristics of REITs.

This article continues to introduce how to purchase REITs and issues related to investment value.

Let me reiterate how to buy REITs here. First, let's talk about the subscription of REITs during the initial fundraising. For ordinary public investors, if the total amount of valid subscription applications from public investors during the fundraising period exceeds the fundraising limit for public investors, the last day of proportional allocation will be implemented, that is, during the fund fundraising period, the day when the total amount of valid subscription applications from public investors exceeds the fundraising limit for public investors is regarded as the last day of fundraising, and the fundraising period for the public offering ends on that day. Valid subscription applications before the last day are fully confirmed, and valid subscription applications on the last day will be allocated proportionally according to the remaining amount.

For example, a REIT product A publicly raises 100 million shares at a price of 5 yuan per share, raising 500 million yuan. On the first day of the fundraising period, the subscription sentiment was hot, and investors applied for a total of 1 billion shares. The fundraising ended on that day, and each investor was confirmed according to 10% of the application. In other words, if investor A subscribed for 10,000 shares and frozen 50,000 yuan in funds, the investor was allocated 5,000 yuan and 1,000 shares of the REIT fund (the calculation is simplified here, ignoring the handling fee. In reality, if the handling fee is considered, the share should be slightly less), which is significantly different from the "lottery" system of the Shanghai and Shenzhen Stock Exchanges.

At present, the effect of making money by subscribing to new REITs funds in China is very strong. Most REITs are in this situation during issuance, and most REITs can obtain very enthusiastic subscriptions from investors. For example, the allocation ratio of Huaxia Hefei High-tech Industrial Park REIT established in September 2022 is only 0.23%, and the allocation ratio of public investors of Huaxia TBEA New Energy REIT in June 2024 is only 0.223%. In other words, for a subscription of 10,000 yuan, the final allocation amount is only 22.3 yuan, which shows the market's pursuit of REITs products.

There is another situation. Suppose that REIT product A has only 80 million valid subscriptions on the first day of the fundraising period, and there are still 20 million shares left on the second day of the fundraising. However, there are 100 million valid subscription applications on the second day. In this case, the valid subscriptions on the first day are full subscriptions, and only 20% of the allocation ratio can be obtained on the second day. This is the so-called "last-day allocation."

In addition to subscriptions on the first day of issuance, more investors subscribe in daily transactions. In terms of channel selection, the most convenient way is still on-exchange trading. Investors can open an on-exchange securities account and purchase REITs products at real-time prices.

Of course, you can also subscribe through an over-the-counter account, which is basically the same as general funds and will not be introduced here. However, it should be noted that REITs are currently rarely sold through banks, independent fund sales agencies and other channels. The most convenient way is still to purchase through an on-site securities account.

In addition to how to purchase REITs, many investors may be more concerned about the investment value of REITs.

my country's public REITs are designed with the same mandatory dividends and equity product design features as foreign REITs. Therefore, the long-term performance of foreign REITs can also be used as a reference in the value analysis of REITs. The United States created products such as REITs during the real estate downturn in the 1960s, attracting investment from social funds by revitalizing and operating existing real estate assets. From 1972 to 2021, the average annual compound return of equity REITs in the United States was about 12%, of which the return brought by price changes was about 4.7%, and the dividend yield brought by high dividends was about 7.3%.

If we assume that domestic public REITs can follow a similar development path as US REITs, then domestic REITs are likely to be the fastest growing and best performing asset class in the next few decades. After all, compared with the United States, my country's stock assets are much larger, and REITs products based on these stock assets may become another main asset for capital allocation in the market in the future.

In the analysis of REITs investment value, as a product with more significant equity attributes, the valuation method of REITs is often similar to that of stocks, and REITs can also be priced using absolute valuation and relative valuation methods.

Absolute valuation generally adopts the net asset value method (NAV), which is to use the total asset value of REITs and then subtract the current liabilities. The valuation of total assets is mainly based on the free cash flow generated annually by the real estate held by REITs in a certain period of time in the future, discounted at a certain discount rate.

The choice of discount rate is a bigger difficulty. The longer-term risk-free rate plus a certain risk premium can be used as a reference.

In terms of relative valuation method, similar to but different from the PE valuation of stocks, the denominator in the relative valuation of REITs is not the net profit per share (EPS), but the cash flow per share. Generally, operating cash flow per share is used. If relevant data is lacking, free cash flow per share is used instead. Referring to the current domestic REITs financial reports, distributable cash flow can be used for analysis.

For ordinary investors, it is difficult to calculate the absolute valuation or relative valuation by themselves. However, here you can refer to the calculated values ​​of major securities firms based on certain assumptions as a reference for investment. The discount rate level used as a reference and the cash flow level of a REIT product will affect its price performance. For example, the reference discount rate - the 10-year Treasury bond yield. The rapid decline of the 10-year Treasury bond yield this year is also one of the important reasons for the surge in REITs.

Another equally significant influence is the operating level of the REITs product itself, which can also be understood as the fundamental performance of the stock.

Taking a REIT product that has been listed and traded as an example, in January 2024, a warehousing and logistics REIT announced that its Wuhan project had reached the point of renewal and price adjustment. The net effective rent in 2023 was 33.37 yuan/square meter/month. The current average net effective rent in Wuhan is 22.20 yuan/square meter/month. After the efforts of all parties, it was finally determined that "starting from January 2024, the net effective rent for the first year of renewal will be 28.98 yuan/square meter/month, and the renewal period will be from January 1, 2024 to December 31, 2028. During the renewal period, the rent standard will continue to increase by 3% annually in accordance with the original lease contract."

In this REIT, the Wuhan project accounts for about 15% of its total leased area, and the rental level in 2024 will drop by more than 13% compared with 2023. Based on concerns about future cash flow declines and price cuts for the REIT's projects in other regions, the REIT plummeted on the same day, with the maximum retracement of about 33% within nearby dates.

Therefore, do not easily ignore the risks of REITs products. As a product with a relatively high proportion of equity attributes, whether it is the changes in its free cash flow or the changes in the risk-free rate of return in the market, it has a huge impact on the valuation of REITs products.

[Note: The market is risky, so be cautious when investing. In any case, the information or opinions expressed in this subscription account are only for the exchange of opinions and do not constitute investment advice to anyone. Except for special notes, the research data in this article is supported by iFinD of Tonghuashun]

This article was originally created by the "Xingtu Financial Research Institute" and the author is Huang Dazhi, a researcher at Xingtu Financial Research Institute