**: Brokerage China.
On 8 February, the China Securities Regulatory Commission (CSRC) issued the Guidelines for the Application of Regulatory Rules – Accounting No. 4 ("Guideline No. 4"). According to the relevant expressions in the provisions, both the original equity holder and the investor can recognize REITs as equity products.
Market participants said that the positioning of public REITs as special equity products is of great significance, which can not only clearly guide the clear issuance logic of the original equity holders, but also help investment institutions to establish matching investment logic, investment strategy, risk control, accounting and assessment mechanism.
Clarify the positioning of the equity attributes of public REITs.
Since the listing of public REITs, all parties in the market have generally recognized the equity attributes of REITs products, and in practice, listed REITs have also been reported as equity at the level of original equity holders, but no clear arrangements have been made at the institutional level.
As a platform for asset listing, public REITs not only obtain the operating income generated by the assets, but also bear the risks related to asset management, rather than obtaining fixed income, and the risk return is closer to equity products.
According to the CSI REITs Total Return Index, from September 30, 2021 to January 31, 2024, the amplitude reached 58%, which fully demonstrates that it is closer to the characteristics of equity attributes.
The No. 4 Guidance issued by the CSRC also points out relevant issues. Guideline No. 4 points out that regulatory practice has found that some companies have discrepancies and disagreements on the interpretation of the shares held by other parties of infrastructure REITs as liabilities or equity at the level of consolidated financial statements by the consolidated original shareholders.
Guideline No. 4 points out that the consolidated financial statements of the original owner of the consolidated financial statements of the shares held by other parties of the infrastructure REITs are presented as liabilities or equity mainly depends on whether the original owner has an obligation to unconditionally avoid the delivery of cash or other financial assets, specifically considering the following two factors:
One is whether infrastructure REITS can avoid cash distribution obligations. According to the relevant regulatory requirements of the China Securities Regulatory Commission and the exchange, if the infrastructure REITs product fails to distribute income in accordance with the relevant regulations for two consecutive years, the relevant ** product will be terminated by the exchange in accordance with the regulations. Accordingly, the issuer has the option to terminate its listing on the exchange in order to avoid the cash distribution obligations required by the foregoing provisions.
The second is whether infrastructure REITS can avoid mandatory liquidation obligations when they expire. Infrastructure REITS are established with an initial term, but they can extend their contract terms through the acquisition of new infrastructure assets through expansion.
Therefore, if the issuer has explained the aforesaid allocation, termination of listing and expansion postponement arrangements in accordance with the relevant regulations, and there are no other agreements that may lead to the judgment of financial liabilities, the issuer does not have an unavoidable payment obligation, and the original shareholders of the consolidated statement should report the shares held by other parties of the infrastructure REITS as equity at the level of consolidated financial statements. From the perspective of the accounting treatment of other investors in infrastructure REITs, the shares held by them are equity instrument investments in nature.
Promote the ecological construction of the public REITs market.
Market participants pointed out that the establishment of a consensus on the equity attributes of REITs products is the basis for the ecological construction of the REITs market, which will further affect the construction of both ends of market investment and financing and the improvement of supporting mechanisms.
First, it is conducive to maintaining the stability of the secondary market and promoting long-term allocation of investment. The introduction of this policy clarifies that REES is an equity product in accounting, and it can choose to include the valuation profit and loss in other comprehensive income financial asset accounts, eliminate the impact of short-term fluctuations in the secondary market on the income statement, alleviate the passive behavior of the market due to liquidity and stop-loss pressure, encourage institutional investors to hold for a long time, and better match the business essence of long-term investment in public REITs. Lay a solid foundation for long-term funds such as social security funds, pensions, enterprise annuities and other allocation investors to enter the market, further optimize the investor structure, and promote the increase in the proportion of long-term allocation funds. At the same time, the public REITs market can better play the valuation and pricing function of long-term investors on infrastructure projects, and guide the primary and secondary trading markets of real assets to be mutually beneficial.
The second is to help the public REITs market to normalize the issuance and stimulate the vitality of assets. Due to the lack of clear institutional arrangements for whether REITs can be included in equity instruments, there are still confusions and doubts in the recognition of equity attributes and the active promotion of project cultivation. The introduction of this policy will help enterprises to revitalize their stock assets, reduce their leverage expectations, and greatly increase the enthusiasm of enterprises to issue, thereby helping the continuous expansion of the public REITs market.
Recently, the 2023 quarterly reports of REITs projects have been disclosed one after another, and the overall operation is relatively stable, with slight differentiation on the margin, and the annual distribution target has been basically achieved. "Some market institutions pointed out that the clarification of the accounting treatment will further promote the market to anchor the underlying value of REITs for trading, and promote the market to fluctuate more closely around the value. At present, many REITs projects may already be in the bottom area of valuation, and their high dividend attributes and allocation value are further highlighted, and the market value is expected to be repaired with the adjustment of valuation methods and the coordinated support of the market, managers and regulators.