Industrial park REITs value geometry
Fan research as innovation investments, REITs in the open market transactions and through the way of securitization turn real estate assets or rights and interests have good liquidity of standardized financial products, not only can provide investors with real estate property appreciation bonus, also can realize the exit through the secondary market liquidity and become a new asset classes outside of stocks and bonds,At the same time, it is also an important tool to realize asset allocation in the capital management market.Since its launch in the United States in the 1960s, REITs has been issued in more than 40 countries and regions. The investment field of this product has expanded from real estate to hotel shopping malls, industrial real estate, infrastructure, etc. At present, it has become a mature financial product specializing in real estate investment.From the perspective of asset characteristics, REITs itself, as a stable anti-inflation property, belong to the third category of assets after stocks and bonds.Its investment risk and return between stocks and bonds, more suitable for the pursuit of “long-term stable” income investors, not suitable for short-term speculation.Industrial park REITs is the most important product among all kinds of infrastructure REITs. As the basic carrier of industrial landing, industrial park has a very close relationship with the development of real economy.It accounted for a third of the first nine REITs launched.China’s industrial park stock market space is wide, is an important carrier of economic development, in the long-term economic potential growth center down, interest rate center down channel, stock capitalization can be revitalized.With the improvement of China’s technological level and information level, China’s industrial parks have also been upgraded to high-tech, information technology, cultural and creative industries and other knowledge-intensive high value-added industries.It has been more than half a year since the first batch of public REITs were listed. Through reviewing the performance of the three public REITs in the secondary market, it can be roughly divided into three stages.1. Stage 1 (the first day of listing) : Driven by the “strike new” sentiment, the price of publicly offered REITs rose on the first day of listing, and the transaction was relatively active.From the perspective of price trend, the three industrial park REITs all showed a certain rise.Specifically, the highest premium rate is Shekou Industrial Park REITs, with a premium rate of 14.72%.Figure 2. The second stage (From June 22 to late August) : After the initial stir-fry, the heat of REITs began to decline, and the transaction activity and price trend of REITs in the three industrial parks fell down one after another.From the perspective of price trend, on June 22, 2021, the average premium rate of three publicly offered REITs dropped to 4.24%, among which, suzhou Industrial Park and other REITs all broke out to varying degrees.This stage REITs depressed reason can be roughly summed up in three points: first, REITs as a relatively new varieties appear on the market, some investors of its underlying assets valuation logic, the secondary market price of central as well as the dispatch of the future cash flows have different degree of confusion, so in early revealed a wait-and-see status.Second, in the initial stage, some institutions did not improve the trading system of REITs, resulting in a certain lack of purchasing power.Third, the unusually active first-day rise and trading volume of REITs are mainly affected by the “hit new” effect, which reflects its stock characteristics.However, the REITs category is both debt and has long-term investment value. The decline of its price and trading volume is a normal value regression.3. The third stage (from late August to now) : The activity increases and the price trend is positive again.Since the end of August this year, under the dual factors of macroeconomic downward pressure and policy supervision, the stock market as a whole has retreated, and both the Shanghai Composite Index and the Shenzhen Composite Index have fallen back to varying degrees.Bond markets, some with higher-yielding bonds continued fermentation, credit risk and bond yields are slightly insufficient, high quality AAA city for debt, for example, its credit spreads continued compression, under this background, the squeezing out certain fund configuration requirements, so the market once again focused attention on the new category in REITs, REITs advantages highlighted again.From the perspective of price trend, since the middle and late August, the prices of REITs of the three industrial parks have shown a significant upward trend, and the premium has hit a new high again.The guarantee of investor income under the policy support is still the key to the attraction of the industrial park REITs market. At present, the three industrial park REITs have experienced ups and downs for half a year, and whether the current valuation has the investment value?Is the value still reasonable after the price keeps rising? Let’s discuss it first from the perspective of valuation.Unlike ordinary stocks, REITs hold a large number of real estate properties. These underlying assets do not depreciate as depreciation is calculated, and in some cases may appreciate. Therefore, the traditional PE valuation may be distorted due to depreciation.It can not well reflect the operating efficiency of REITs, the real remaining cash flow and the ability to pay dividends.In order to evaluate the actual operating capacity of REITs more truly, P/FFo is generally used to evaluate REITs internationally. P is the price (market value) of REITs.FFO is a valuation method proposed by NAREIT in 1991, namely Funds From Operations. FFO can be defined as adding asset depreciation and amortization on the basis of Net Income.And subtract asset disposal gains, gains and losses due to changes in control rights, impairment and write-downs due to asset depreciation, namely: net income + amortization + depreciation – capital gain from real estate sales.REITs companies regularly disclose this figure in their financial statements.Search Funds from Operations in quarterly reports to find FFO data tables.Using PFFO in the picture can better reflect whether the operating benefits, real residual cash flow and dividend payout ability of REITs are reasonable, especially for the horizontal comparison between REITs of similar assets.If the value of PFFO is large compared with similar or historical values, there may be overvaluation in the secondary market, and vice versa.According to the calculation, the current market value of Suzhou Industrial Park, Shekou Industrial Park and Zhangjiang Guangyuan REIT corresponding to 2022 P/FFO are 27.5 times, 27.2 times and 24.9 times respectively, and the average P/FFO of the three products is 26.5 times.So is this valuation reasonable?We might as well compare overseas mature products.The current market value of the first three industrial park products is 26.5 times the average P/FFO in 2022.From the perspective of the US market, the average P/FFO of US industrial park REITs products in the past five years (2016-2020) is 26.4 times, so it can be seen that the valuation of China’s industrial park REITs is still reasonable.On the other hand, if we look at the foreign mature products, the valuation of high-quality park assets in mature industrial parks still has room for continuous improvement.Here, ARE is selected as the benchmarking of park products in China.Founded in 1994, ARE (Alexandria Real Estate) is the first US REITs focused on the life sciences industry. It listed on the New York Stock Exchange in 1997 and was selected to the S&P 500 index in 2017. It is the first real estate operating developer in the life sciences and the longest lease term.In 2019, ARE had revenue and market cap of $1.53 billion and $26.4 billion, with just 439 employees.Data show that ARE’s P/FFO has increased from 15.7 times to 17.7 times in 2020 in the past 10 years, thus proving to some extent that the valuation of high-quality park assets has the potential to increase.The mandatory dividend feature of REITs can provide investors with stable cash distribution on a regular basis to supplement their liquidity.So, is the current dividend rate of the three industrial parks reasonable?From the perspective of the reasonable dividend return rate of REITs in developed countries, usually the 10-year Treasury bond yield plus about 150 to 250 basis points is a reasonable range of REITs dividend rate.Considering that China’s 10-year Treasury bond yield in the past three years is between 2.9 and 3.6%, the dividend yield of REITs is generally 150-250 basis points higher than the 10-year Treasury bond, and infrastructure REITs like industrial parks are 100 to 150 basis points lower than other types of REITs,Therefore, the rate of return of industrial park REITs is between 3.75%-4.75%, which is in line with the international law.From the public data, according to the pricing calculation of the corresponding dividend yield of the public REITs of the three industrial parks, the current BOshi Merchants Shekou Industrial Park REIT, Soochow Suzhou Industrial Park REIT and Hua ‘an Zhangjiang Everbright Park REIT are 3.53%, 3.55% and 3.53% respectively (based on the closing price on January 12).It is slightly below the international norm.To sum up, after the precipitation after early stir-fry, the valuation of REITs products in China’s parks is still within a reasonable valuation. At present, REITs in three industrial parks still have reasonable investment value, which is in line with the goal of stable income of REITs products based on the “medium and long term”.However, from the point that the dividend rate of REIT products in industrial parks is lower than the international law, investors have high expectations for the growth of cash flow generated by their products.It should be pointed out that the industrial park is set up by the government to achieve industrial development goals, and its functions are mainly to promote industrial upgrading and cultivate emerging industries, etc. It has the property of urban investment, so it is suitable for investors who pursue cash flow “flowing slowly”.Expectations for cash flow growth from underlying assets should not be too high.At present, the second batch of REITs has also been sold to the public, including CCB Zhongguancun Industrial Park REITs also sold out in a day, we wait and see how the follow-up trend.