The Financial Performance of Newly Launched Chinese Infrastructure REITs

Abstract

This paper explores the financial performance of the first group of nine infrastructure real estate investment trusts (REITs) that went public in mainland China in June 2021. Under the short-term event study framework, this research compares the abnormal returns and correlations of nine Chinese REITs with three groups of competitors (i.e., 49 quasi-REITs, 54 infrastructure asset-backed securities (ABSs), and 132 Wind utility firms). Three approaches are used to evaluate the performance of REITs: Risk-return indicators (e.g., Sharpe ratios and Jensen’s alphas) and raw returns measure the preliminary results, and panel data analyses capture the relative advantages of REITs over their competitors within the infrastructure industry. REITs are small-cap firms with the largest Sharpe ratios and greater diversification potential than the ABSs. Despite beating the market, they did not start to trade with a premium until the first month after their initial public offerings (IPOs). Post-event annualized abnormal returns are more than 15% against the ABSs and close to zero against Wind utility firms after controlling for key financial variables, and three mechanisms behind the REIT IPOs (i.e., asset type, taxation, and liquidity) are verified. Therefore, REITs outperform quasi-REITs and infrastructure ABSs as well as the market proxies, and their launch brought out favorable outcomes.

Keywords:

• Event study
• economic evaluation
• IPO
• infrastructure industry
• panel data

Notes

1 According to Wide Moat Research, all G7 countries and a number of developed and developing nations have publicly traded REITs. In Asia, Singapore, Japan, and South Korea introduced listed REITs first in 1999, 2000, and 2001, and then Hong Kong and Malaysia followed their steps in 2003 and 2005; later Pakistan, the Philippines, India, and Vietnam launched REITs in 2008, 2010, 2014, and 2015, respectively.

2 A Chinese ABS under prepayment condition means its issuer has already paid off part of the principal, leading its transaction price much lower than the face value.

3 Given that one month usually comprises 22 trading days, we use a 22-day rolling window for a 6-month correlational analysis.

4 Most of the excluded ABSs are not publicly traded and thus do not have enough financial information. Per company profiles, the excluded ABSs and Wind utility firms are generally state-owned enterprises with strong ties to local governments and easy access to bank loans. Their financial situation and ability to earn profits are probably as good as the included ones.

Additional information

Funding

Piao’s research was supported by the STU Scientific Research Initiation Grant (STF21015).