Pure-play China Retail REITs – A catalyst to rekindle China retail investment appetite?

December 18, 2015 / By  

On 11 December 2015, BHG Retail REIT (“BHG”) had its IPO, raising SGD 394.2 million on the Singapore Exchange. BHG is not the most attractive S-REIT from a return perspective. It’s forecasted yield is lower than yields offered by direct comparables in the market, such as the Mapletree Greater China Commercial Trust (“MGCCT”) and the CapitaRetail China Trust. Nevertheless, the REIT IPO was a victory in itself because it was the first China REIT IPO since MGCCT’s 2013 debut on the same exchange. Positive market opening signals such as this may open the door for other China retail asset owners to explore similar opportunities and rekindle the retail investment market.

Investment volumes in China by asset class 2008- 3Q2015

Picture2_18Dec2015Source: JLL Research

BHG is backed by Beijing Hualian Department Store, a Chinese retail operator and developer. The REIT’s portfolio consists of full or partial interests of “community” shopping malls located in Beijing, Dalian, Hefei, Chengu and Xining. BHG plans to use the proceeds of the IPO to invest in retail assets across China, but with a preference towards Tier I and II cities. Given its recent fundraising success, BHG will be investing into a sector that has been historically underweight in the investment market.

Post the global financial crisis, retail asset trades were only 18-26% of the total investment volume. BHG’s future investment activity, along with renewed enthusiasm for retail assets from institutional investors who are eyeing offshore IPOs, may provide just the right spark to make retail “interesting” again in China.

BHG Retail REIT’s Asset Portfolio*

Picture3_18Dec2015Source: BHG Retail REIT IPO Prospectus, December 2015
*The REIT only owns 60% interest of the Beijing mall

Foreign institutional investors in particular have very good reasons to take BHG’s case study to heart. China retail was once the darling of real estate funds from 2004 to 2007, when USD 24.2 billion in funds[1] was raised through having that exposure featured prominently on fund prospectuses. That, in turn, led to many foreign funds of that vintage to go overweight on retail assets.

Since then, retail assets in China have faced a multitude of challenges, including a general oversupply of retail space in the market, wide price gap between buyers and sellers as well as the disruption of retail due to the growth of e-commerce in China. To these investors, viable capital market exit options may just be what they need.

A successful market reopening deal such as the BHG Retail REITs IPO on the Singapore Exchange will definitely garner a lot of attention from both retail and institutional investors alike. In particular, institutional capital, with a soft spot for capital market exits for institutional real estate portfolios, will definitely try to realign their strategies to amalgamate a portfolio of retail assets that will groom them for a similar big day. Given the amount of outstanding retail assets sitting in the portfolio of institutional investors as well as those sitting on the balance sheets of domestic developers, we can be optimistically hopeful that this may bring back investment appetite for retail assets.

[1] Source: Preqin, JLL Research. Total funds raised from the 2004 to 2007 vintage with exposure to invest in China retail malls and shopping centres. Macau focused Sniper Capital was excluded in the tally.

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