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    Two classic cases: How do real estate funds carry out REITs-like business?

    2019-02-11 15:40:24

    Graphic finance

    In the past year, the domestic real estate securitization market has developed rapidly.

    There are more participants, more types of properties, and more representative cases.

    The stock market is large, which is convenient for us to summarize the rules and guide the practice.

    Practice is very important.

    During this period of time, I chatted with many friends who are real estate funds and found that although everyone is very concerned about the real estate securitization market, they only know the framework and the ambiguity; or idealism, blind optimism; or critical negation, evaluation of negative .

    In fact, from the perspective of a practitioner, the real estate securitization market is still in its infancy, and there are indeed many problems. In terms of system construction, market cultivation, investor groups, etc., there is a big gap compared with mature markets.

    Hope in this market, to help you solve all the problems, can only bring disappointment.

    But it must be recognized that the first-mover advantage is often laid at this time.

    Even in the initial stage, many people have already achieved their goals through this market.

    Today, we will study two classic cases, take a look at them, how do they do it, and what can we learn from it?

    Before starting a formal analysis, we must first explain that all of the following analyses are based on project disclosure materials and publicly available materials. The data sources are the administrator's website, the exchange website, and the underwriting team.

    Structure students will only be objectively analyzed and will not be interpreted indiscriminately.

    Further, our next discussion will focus on one issue:What types of REITs are recognized by investors?

    Institutional investors are more rational than individual investors and are very familiar with the real estate industry –No one will be a fool, let others take out real money to recognize you, always give them enough reasons.

    The perspective of converting into a real estate fund is:What conditions do real estate funds need to meet in order to develop REITs?

     Two classic cases: How do real estate funds carry out REITs-like business?

    With these questions, let's take a look at the first domestic PERE+REITs - Da Rongcheng REITs.

    The project led by Fangguang Daanshi, is a leading real estate fund management company in China, and successfully built the self-owned business management brand “Da Rongcheng”. The target property is the Guanyin Bridge Da Rongcheng project in Chongqing.

    The transaction structure is more traditional, belonging to the typical special plan + private equity fund + project company + target property model, see the following picture:

     Two classic cases: How do real estate funds carry out REITs-like business?

    The final result was very good, with a priority of 3.8% for the A file and 4.3% for the B case, which set a record for the lowest interest rate for the same type of product at the time.

    Then we have to ask one of the most important questions:Why do investors recognize this single type of REITs?

    We already know that at this stage, REITs are still in the category of fixed-income securities, and institutional investors are still biased.safety.

    Therefore, along this line of thinking, the structure classmates analyzed the credit enhancement measures of this single project, mainly the following:

    Asset disposal income cash flow

    Excess coverage

    Asset disposal income under pressure of 36% cumulative decline

    Coverage factor for priority A file principal >1.23

    Coverage factor for priority principal > 1.00

    Property holder's net cash flow

    Excess coverage

    Property holder FFO under pressure

    Coverage multiple of expected income for priority A file >1.37

    Coverage multiple of expected earnings for priority files >1.08

    Property mortgage

    Guanyin Bridge Da Rongcheng has an estimated value of 2.502 billion yuan. According to the construction of 127,700 square meters, the unit price is 19,400 yuan/m2.

    Priority A level 1.3 billion, LTV = 52%

    Priority 1.6 billion, LTV = 64%

    Everbright Holdings Balance Payment

    Everbright Holdings offers a differential payment commitment

    Structured stratification of securities

    Priority A: Priority B: Secondary = 13:3:9, secondary ratio 36%

    The part of the yellow mark can be said to be the key to this project, a reasonable valuation + a reasonable mortgage rate + the difference payment commitment of Everbright Holdings,Make priority asset-backed securities, presenting the credit characteristics of private equity bonds issued by Everbright Holdings with commercial property mortgage guarantees.Naturally, it has won the favor of investors.

    Domestic similar to Guangda Anshi, there is a strong shareholder background, and there are many real estate funds that shareholders are willing to provide credit, and many organizations are trying to promote REITs.

    For example, a single product that is being introduced in the near future -Jingrui Holdings-Zhenrui Investment Beijing-Shanghai Office Property Asset Support Special PlanThe leading Ruirui Investment is a fund platform of Jingrui Holdings focusing on the investment, development, transformation and operation of holding office properties. The target property is Jingrui Zhangjiang Center Project and JingruiZhongguancunThe project, and Jingrui Real Estate as a credit enhancement agency, we look forward to their performance.

     Two classic cases: How do real estate funds carry out REITs-like business?

    If the successful issuance of the Dahengcheng REITs project, the key is that Guangda Anshi as the “rich second generation” can rely on the main credit of China Everbright Group. The new apartment REITs project is the grassroots real estate fund, which opens another the way.

    First look at the transaction structure chart:

     Two classic cases: How do real estate funds carry out REITs-like business?

    It is also a model of a more traditional special plan + contract fund + project company + standard property, not to mention here.

    The point to emphasize here is the priority and equity level of this single project.Are marketized sales to institutional investors,Not owned by the original owner.

    Therefore, we have to start from the investment logic of the two types of securities, namely priority and equity, to see why it can finally succeed.

    For priorities, institutional investors value security.

    As with the previous project, we list the core risk control measures:

    Priority/equity level arrangement

    Priority 130 million

    Equity level 140 million

    Cash flow excess coverage

    Target property net cash flow

    Expected return coverage ratio of priority = 1.01~1.53

    Target property overview

    Located in the east third ring of Beijing CBD, 70 years of residential property rights

    Building 5711m2

    Appraisal value of 315 million

    The average price of the assessment is 55,000/m2

    Subject property mortgage

    Priority LTV=41%

    All asset-backed securities LTV=85%

    We saw,The priority has two obvious advantages of over-coverage + 40% mortgage rate, which has won the recognition of investors.

    We should also realize that as a property with 70 years of residential property rights, the market price of the underlying property is generally between 80,000 and 100,000. After considering this factor,LTV will be further reduced to around 25%.

    Things have been cheaper to this point, and what external credit enhancements are needed?

    The investment logic of the equity level is actually accurate. We can understand that with a capital of 140 million, borrowed 130 million yuan, only 5.3% of the leveraged funds, and acquired a property worth 500 million yuan.

    3% down payment to buy a house, everyone knows?

     Two classic cases: How do real estate funds carry out REITs-like business?

    Further, we have to ask another question:Why are they able to accept such a big discount?

    Because the cost is low enough and the space is large enough.

    Guanyin Bridge Da Rongcheng, originally a rotten tail building called Modern Square, was the first commercial project acquired by the Guangda Anshi team. It was officially opened after the transformation and upgrading in 2010.

    The initial purchase price of the new apartment is 22,000/m2. Even if it is with an average price of 55,000/m2, the appreciation is very large.

    In this way, real estate funds can first confirm a part of the appreciation income, and at the same time realize the actual control of the property through the form of commercial management + preferential acquisition rights.

    Imagine three years later, Guangda Anshi and Xinpai Apartment set up a private equity fund to acquire the underlying property. REITs will withdraw at a level slightly higher than the initial price. The role of staged financing of REITs is fully reflected.

    The above two cases represent the core logic of the two types of real estate funds to carry out REITs-like business, and also reveal a very important reason for us:

    At this stage, the key to the real estate fund's business of REITs is price.

    Whether it is Da Rongcheng REITs (priority LTV=60%) or new apartment apartments REITs (priority LTV=40%), the reasonable valuation of the subject property and the higher discounts ensure the smooth collection of priority shares. .

    Strong expectations for appreciation, as well as a reasonable discount rate, are the key to attracting secondary investors.

     Two classic cases: How do real estate funds carry out REITs-like business?

    Finally, I want to talk about the inspiration that the above analysis brings us.

    It is true that China’s asset prices are no longer likely to show such explosive growth over the past five years.

    The appreciation space is reduced. Does it mean that the new apartment apartment REITs have no reference value?

    Obviously not.

    In today's domestic real estate market, there are many opportunities to get gold.

    Beginning in 2016, China has entered a new round of non-performing asset investment opportunities.

    Special opportunity funds have entered the market and acquired high-quality assets at a low price that many people can't think of.

    Raising funds → M&A assets → repairing assets → holding operations → fund allocation and liquidation, this typical real estate private fund cycle usually takes 3 to 5 years.

    This is also the reason why, in the second half of 2018, we have seen the city's renewal/content innovation projects entering the market.

    I also believe that in 2019, there will be more special opportunity funds in the REITs field.

    Finally, borrow a sentence from the founder of the new apartment, as the end of today:

    "All new things in China need to be innovative, and they all need to be broken. So you can't wait until the green light is on. You must do all the preparations in front of the red light. When the green light is on, you will be the first to rush out."

    Hot searchReal estate fund REITs

    Editor in charge: Robot RF13015

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