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Publicly offered FOFs (funds of funds) are turning their attention to real estate investment trusts (REITs).

According to Wind statistics, as of the end of the second quarter of this year, three REITs have been heavily held by public FOFs.

According to statistics and analysis by China Securities Credit Ratings, in July 2023, many public FOFs announced that they would include public REITs in their investment scope. Since then, the scale of investment has continued to expand, and the types of investment have also continued to increase. So far, the public FOFs investing in REITs are mainly mixed FOFs, especially pension-oriented FOFs, and a small number of stock FOFs have also participated.

Real estate REITs are heavily invested

Publicly offered FOFs are known as "fund buyers". According to the second quarter reports of the funds, Hongtu Innovation Shenzhen Anju REIT, Hua Xia Beijing Affordable Housing REIT and Penghua Qianhai Vanke REITs (quasi-REITs) all appeared on the FOF fund's heavy holdings list.

Specifically, the underlying assets of the three REITs are all real estate. Among them, Penghua Qianhai REITs is heavily held by Xingquan Antai Active Retirement Target Five Years and Jianxin Tianfu Leisurely Steady Retirement Target One Year, with a total holding of 55.7 million yuan.

The other two are Hongtu Innovation Shenzhen Anju REIT and Hua Xia Beijing Affordable Housing REIT, both of which are heavily held by Tianhong Ruixiang 3 Months Holding A, with a total holding of 224,000 yuan.

In recent years, the scale of public FOFs' allocation of REITs has continued to grow. According to incomplete statistics from China Securities Credit Ratings, the number of FOFs participating in REITs has gradually increased from 11 in the third quarter of 2023 to 49 in the first quarter of 2024. At the same time, the investment focus of public FOFs in public REITs has gradually shifted from ecological and environmental protection to highways. Despite this, the scale of FOF investment in REITs is still relatively small, accounting for 0.03% of FOF assets and 0.11% of REITs investable market value in the first quarter.

The report analysis of China Securities Pengyuan Rating pointed out that the main limitation of FOF investment in REITs is the listing period. FOF investment in REITs must meet the listing period of 1 year, and the retirement target FOF investment in REITs must meet the listing period of 2 years, which limits FOF participation in new issuance (except for ordinary special account FOF). At the same time, the issuance scale of REITs itself has a requirement of no less than 1 billion (800 million for affordable housing), and the scale requirement is automatically met.

REITs market expansion accelerates

Wind Information data shows that as of August 23, there were 42 public REITs listed and traded, with a total issuance size of over 127.7 billion yuan.

Especially this year, the expansion of the public REITs market has accelerated. According to Wind statistics, as of August 23, 12 public REITs have been listed this year, with a total fundraising of nearly 29.2 billion yuan, exceeding the level of the whole year last year in both number and scale.

In terms of market performance, 36 products achieved positive returns this year, accounting for more than 85%. Among them, Huaxia Beijing Affordable Housing REIT rose 32.69% this year, and seven other products, including Bosera Shekou Industrial Park REIT, Harvest China Power Construction Clean Energy REIT, and CICC Xiamen Housing REIT, achieved returns of more than 20% this year.

In terms of policy, on August 1, infrastructure REITs projects officially moved from pilot projects to regular issuance. The new policy expanded the scope of issuance, such as the inclusion of market-based long-term rental apartments. For the first time in the rental housing sector, market-based rental housing projects that are self-owned by professional institutions, not split and sold separately and used for long-term rental, and rental housing projects that provide supporting services for enterprises in the park were included in the underlying assets.

Li Chao, chief economist of Zheshang Securities, believes that strong supply and demand are the main reasons for the accelerated expansion of the public REITs market.

Li Chao believes that in the long-term investment cycle, the secondary market price of REITs will fluctuate around the fundamental factors such as the operating conditions of the underlying assets, dividends, and the macro market. In the long run, the market price will not deviate too much from the fair value of the actual assets, and the secondary market price will show a return to the intrinsic value of the product. In addition, with the continuous development and growth of the public REITs market, the continuous improvement of supporting systems, the development of the long-short balance mechanism, and the development of ETFs and related derivatives, the future public REITs will not only have allocation value from the perspective of asset diversification and risk diversification, but also bring opportunities for investors to share the dividends of my country's long-term economic growth and social development in the new stage of high-quality economic development in my country.

Industry insiders analyzed that as the scale of domestic public REITs exceeded 100 billion, the scope of investment has gradually expanded, which is more in line with the goal of FOF funds to diversify risks and maintain stable returns, so this type of asset has begun to be favored by FOFs. It is expected that public FOFs will further increase their investment in REITs in the future, providing investors with more diversified asset allocation options.