YOU MAY HAVE noticed how government officials and developers are talking up real estate investment trusts (REITs) while professional investors declare themselves far from as certain about the prospects of these instruments.
The basic idea is simple: put a number of properties into a trust, sell units of the trust at the net asset value (NAV) of these properties and then pay out the net rental income as dividends to the unit holders. Hey presto, where a term deposit with a bank now pays less than one-tenth of 1 per cent interest, the REIT unit holder can get 6 per cent.
Government officials like the idea because REITs are a big thing in other countries and Hong Kong should do what other countries do or else Singapore will catch up with us and we cannot have that. This, of course, is no sort of reason at all to put money into a REIT but did you really expect commercial sense from government?
Developers say they like the idea because it provides another way to raise capital for property development. Most of them are gung-ho to list REITs on the stock market after the Securities and Futures Commission finally clears the way with new regulations.
And then we get the fund managers who spend their professional lives looking at investments in the way that you should look at them when considering a REIT - will we make money from this, and more than we can make from something else at an acceptable risk? They start with a healthy dose of suspicion about the motives of the developers. Why should it be such a big thing that REITs provide a new avenue for raising capital when there is plenty of money available through the old avenues?
Our banks are running a loan to deposit ratio of only 82 per cent in Hong Kong dollars at the moment and are so desperate to get deposit money out to work that they are willing to lend it at an average of 235 basis points below the best lending rate on new mortgages. We are not short of capital. We are brimming over with the stuff. The investment shortfall is one of opportunity, not of money.
And then there is that follow-up dose of suspicion: are you developers keen on REITs because you think they offer you a chance to foist your duff properties on the investing public?