Public REITs Hit Limit Down

As 2024 ushers in a new year, the once-reliable public Real Estate Investment Trusts (REITs) have experienced significant turmoil, causing shockwaves across the financial marketsJust recently, several public REITs released their operational results for 2023, revealing underlying fluctuations that have led to considerable turbulence in the secondary marketNotably, some products have faced severe financial distress due to declining rental incomes, leading to drastic sell-offs, with one product even hitting its trading limit down on January 10 despite two suspensions meant to mitigate the declineFurthermore, there are ongoing challenges from last year’s lease termination events, crippling occupancy rates that have yet to return to their peak levels, resulting in multiple trading suspensions and cumulative declines exceeding 30% within a month.

From a categorical standpoint, ownership-type REITs have been most affected by these market trends, suffering substantial losses as rental performance and occupancy rates plummetIn contrast, REITs linked to stable, cash-generating assets, particularly those involved in high-traffic highways and related infrastructures, have proven more resilient against this downturn.

A case in point is the Jiashi JD Warehousing Infrastructure REIT, which faced a halt in trading following a day of suspensionOn January 10, after resuming trading, the fund began the day with a low opening price that further spiraled downwards, reaching its daily limit before closing at a 9.92% loss, with total turnover recorded at approximately 26.92 million yuan.

On January 4, Jiashi JD Warehousing Infrastructure REIT announced a drop in rental rates, indicating that the net effective rental price for a key warehousing project in Wuhan would decrease from 33.37 yuan per square meter, which was the prevailing rate throughout 2023, to 28.98 yuan starting January 2024.

Despite the fund manager's assertion that the inaugural rental price represents a 30.54% increase above the market average as of 2023, the sentiment in the market remained notably pessimistic, with widespread sell-offs translating into further price declines.

According to Wind data, since its listing on February 8, 2023, the Jiashi JD Warehousing Infrastructure REIT has seen a staggering 37.42% drop in its secondary market price

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Earlier on January 8, the fund had already experienced a suspension due to a cumulative drop exceeding 10% over three consecutive trading days, a respite that proved ineffective as it continued to tumble by an additional 8.64% upon resuming trading.

Faced with a persistently tumbling secondary market, fund managers alongside the original stakeholders have resorted to self-rescue strategiesOn January 10, Jiashi Fund revealed that it had received a plan from the original rights holder, JD Technology, stating the intent to increase their holdings through the secondary market, amounting to no more than 18 million yuan.

Additionally, Jiashi Fund announced its own purchasing intentions, committing to buy up to 10 million yuan worth of shares over the next twelve months through recognized trading methods on the Shanghai Stock Exchange.

The trend of trading suspensions has not been exclusive to Jiashi's REIT; the severity of market downturns has instigated many public REITs to halt their operations after extreme fluctuations since the fourth quarter of 2023. This has led to simultaneous trading suspensions for numerous investment vehicles that primarily comprise property ownership.

For instance, on January 10, the Hua Xia and Da Gao Ke REIT declared a suspension for one hour following a notice that its closing market price had plummeted to 1.939 yuan, representing a staggering 10.52% drop since January 4.

Hua Xia and Da Gao Ke REIT released data detailing their operational results for the second half of 2023 just prior to the market suspension, indicating a slight reduction in rental rates across the underlying assets.

As of January 10, Hua Xia and Da Gao Ke REIT had receded by 1.5%, while the Hua An Zhang Jiang Industrial Park REIT also suspended operations due to a closing price drop of 6.41% on January 9, marking a cumulative decline of 13.11% over three days.

Recent statistics from Wind indicate that within the last month, six public REITs have been temporarily suspended due to significant price drops, with ownership-type projects constituting the majority of these cases.

This market correction has exposed underlying vulnerabilities among property-based REITs; for example, the Hua An Zhang Jiang Industrial Park REIT, affected by lease terminations related to the "Zhe Ku" incident, reported an occupancy recovery up to 72% by year-end 2023, yet remains far from the 92.60% it recorded at the end of 2022.

Additional challenges persist, as operational management seeks to aggressively secure new leases to counteract losses from previous early terminations

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Moreover, the fund has established compensatory measures for impacts caused by the lease terminations.

In contrast, some public REITs have reported operational performances exceeding initial projections for 2023, evidenced by increased occupancy rates and robust traffic flows, leading to heightened income levels in various sectors.

For example, the Hongtu Innovation Shenzhen Anju REIT announced superior performance metrics relative to its forecasts, with many projects seeing occupancy rates exceed 97% in the latter half of the year.

Similarly, the Huaxia Hefei Hi-tech REIT reported encouraging figures, with its three key projects achieving occupancy rates beyond forecasts, suggesting a positive trend of operational performance in this subset of the market.

Meanwhile, in the sector of concession-based REITs, the Huaxia China Communications Construction High-Speed REIT noted improvements in operations driven by a rebound in travel demandThe average daily traffic flow reached approximately 22,953 vehicles, demonstrating a 25.0% increase compared to the final quarter of 2022.

Li Yaoguang, deputy general manager at CICC Fund, emphasized that the risk-return profile positioned between equities and bonds enhances investment portfolios' efficacy and creates new value amidst lower prices and historically high yield spreadsThis creates a compelling case for public REITs moving into 2024, especially considering anticipated stabilization factors and the need to focus on differentiated operational governance and value reassessments.

Overall, while public REITs are being subjected to acute scrutiny in the face of declining performances, there is room for optimism as some facilities thrive and yield positive surprises

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