The Financial Services Development Council’s (FSDC) research paper, Developing Hong Kong as a Capital Formation Centre for REITs, details a number of proposals which, if adopted, would increase employment in Hong Kong and assist in growing Hong Kong's economy.
Knight Frank supports these proposals as if implemented they would bring Hong Kong’s REIT market in line with competing markets. The proposals cover the following:
- Recategorisation of Hong Kong REITs under the Mandatory Provident Fund Schemes Regulations, to remove a significant constraint that currently applies to MPF scheme investment in REITs
- Giving Hong Kong REITs the same tax transparency treatment that applies in other jurisdictions
- Permitting REITs to undertake limited property development activities, in line with other REIT markets
- Improving the application of the Takeovers Code to Hong Kong REITs
In his Policy Address announced yesterday, the Chief Executive of Hong Kong SAR referred to the FSDC which was established last year to provide a high-level, cross-sectoral platform to advise the Government on ways to further develop Hong Kong’s financial services industry.
The Chief Executive said, “The FSDC has submitted its first set of reports to the Government which analyse the opportunities and challenges for Hong Kong’s financial services industry. The reports discuss in detail Hong Kong’s future positioning and strategic development as an international financial centre, and put forward proposals in respect of Renminbi business, asset and wealth management, and real estate investment trusts. The Government will examine and follow up on these proposals in collaboration with financial regulators.”
The FSDC research paper on REITs is one of those first reports.
Paul Hart, Executive Director, Greater China at Knight Frank, commented, “The proposals contained in the FSDC paper would bring Hong Kong’s REIT market in line with Australia and Singapore. Removing the MPF restrictions on investment would give investors the opportunity to invest in secure higher yield investment stock. In turn the increased liquidity would help REIT managers build portfolio value and therefore acquire more assets. It also makes Hong Kong a more attractive market place for REIT managers to list.”
He also added, “Allowing REITs to carry out limited property development activities is a plus for investors. Hong Kong investment properties trade with low investment yields of below 3.0% that are well below REIT dividend yields of 5% to 8%. This makes it difficult for REITs to acquire stabilised assets. By allowing REITs to develop and hold assets the manager is able to capture the development profit which is passed on to shareholders.”
“Overtime the functional utility of real estate diminishes and, as it currently stands, REITs can’t redevelop their own properties. As such allowing REITs to undertake limited property development is a very practical and sensible measure that addresses a unique Hong Kong anomaly. “
In terms of the effect that this would have on the development sector, Paul added, “This measure would allow REITs to compete head to head for development opportunities. In a free market environment like Hong Kong competition is a good thing.”