The dark side of Chinese SREITs

In April this year, we looked at the total returns for S-REITs with a local and overseas geographic exposure and found that S-REITs focusing on Singapore tend to perform better.

We also noticed that some of the underperforming REITs had significant exposure to China. Some of these REITs also had Chinese shareholders.

Here we look at the dark side of China S-REITs and attempt to provide insights on why many of these Chinese REITs underperform.

EC World REIT & Dasin Retail Trust as examples

Back in April 2022, we looked at two Chinese S-REITs, EC World REIT (SGX: BWCU) & Dasin Retail Trust (SGX: CEDU) and assessed the likelihood of default or collapse.

We concluded that unless the companies are able to refinance their debt, the downside risks outweigh any upside potential and investors may be better off looking for opportunities with a better risk-reward return ratio.

Since then, the share price for these two REITs have been on a steep down trend and the REITs have been in the news multiple times.

Each time, it seems like the REITs are closer to collapsing. We will study these two REITs as they exhibit many of the common issues with China REITs.

Note that these issues may also be present in other REITs.

Issues Plaguing S-REITs with China exposure

1) The unknown killer: Financing

To be clear – there are severe implications where financing cannot be secured and ease of fund flow will be significantly impacted.

Dasin is still unable to refinance

Dasin’s loan facility matured a couple of years ago and Dasin has been on short term extensions while negotiating with the banks to restructure its debt. This negotiation hit a speed bump after talks for a potential memorandum of understanding (MOU) with a Chinese entity fell through.

This comes after a representative of Dasin’s major unitholder said transactions proposed under the MOU were illegal under Chinese law.

The representative also expressed dissatisfaction at recent actions taken a substantial unitholder of Dasin and said that it viewed the actions as detrimental to the MOU.

To make things worse, Dasin’s lenders have also found out that Dasin’s CEO has yet to avail the finalised version of the debt restructuring term sheet to Dasin’s Board.

Some lenders would like Dasin’s Board to first ratify the finalised restructuring term sheet before the lenders seek internal approval for the same.

Dasin’s Board has also been informed that certain lenders believed that the finalised restructuring term sheet had been ratified by Dain’s Board and have already put the restructuring term sheet through their respective internal channels for approval and are shocked that this was not the case.

Consequently, the lenders are concerned whether the CEO is acting in the interests of all stakeholders and if conflicts of interest are being managed appropriately. The Lenders lhave requested the Board to review the conduct of the CEO and take appropriate action to ensure that the interest of secured lenders are safeguarded.

EC World REIT refinanced after a long time

EC World previously had more than 98% of its borrowings due in 2022. All of its refinancing were fully completed only in June 2023. This means there was a default period of at least half a year or more. In the interim, the sponsor had to step in with an RMB 200 million margin deposit to pacify the lenders.

2) Sponsors: Bane or Boon?

In many cases, where the sponsor’s help was needed, minority shareholders would find that the sponsor’s ability to help was limited or even worse a detriment to the interest of minority shareholders. 

Dasin’s infighting

Dasin’s substantial shareholder and Sponsor is suing its Lead Independent Director (ID), seeking an order to restrain the Lead ID from further involvement in Dasin’s refinancing exercise and discussions on allegations that the Lead ID’s conduct has been oppressive and in disregard to its interests.

The substantial shareholder is also seeking to terminate its restructuring advisor’s services in conducting an independent business review, and that the advisor too be restrained from further involvement in the refinancing of the loan facilities.

Boards have a lead independent director to provide leadership in situations where the Chairman is conflicted, and especially when the Chairman is not independent.

This brings about doubts on the Sponsor as the Lead ID is being restrained.

EC World REIT’s limited support

Back in October 2022, EC World said it would be divesting its interests in Bei Gang Logistics and Chongxian Port Logistics for RMB 2.03 billion yuan back to its sponsor at a premium to independent valuation.

As this was a material transaction, EC World sought and received the approval of unitholders but the deal’s completion has been delayed past its long stop date. Consequently, EC World had to seek SGX’s approval for a time extension and now have to provide fortnightly progress updates.

The extension is due to the purchaser (Sponsor) being unable to complete the purchase as they are in the process of obtaining the relevant financing approvals from their lending banks.

In this case, while the sponsor did support the refinancing, the support was limited as it took a long time to refinance even after the debt matured, resulting in default interest being paid as well as damage to the share price. The sponsor has also not yet been able to complete the purchase of the assets.

This brings about doubts on the Sponsor’s financial ability.

So why are Sasseur, BHG and Capitaland China Trust okay?

The three other Chinese centric REITS, Sasseur REIT (SGX: CRPU) BHG Retail REIT (SGX: BMGU), and Capitaland China Trust (SGX: AU8U) all seem to be doing much better.

It’s all down to their sponsors.

CCT has a credible Singapore based sponsor who is owned by Temasek and investors probably do not have to worry about any of these issues happening.

The Sasseur Group and Beijing Hualian Department Store are the sponsors of Sasseur REIT and BHG Retail REIT respectively.

While both these sponsors are well known and sizeable in their own accord, they are still subject to market forces and may crack under pressure.

The (unknown) Dark Side of China S-REITs

EC World and Dasin are two great examples of the unknown risks present to investors of China REITs.

Each time something happens, it looks like a different, independent or isolated problem at the onset, but with time, investors tend to realise it is actually the same problem(s) that has occurred to previous listed companies.

Fundamentally, it is the duty of the sponsor, substantial shareholder and REIT manager (typically owned internally by either of these parties) to manage the REIT in a way that delivers stable returns to minorities rather than drag minorities through a rollercoaster ride.