Jake's View

FSDC adviser Bill Strong has weak argument for stopping reit profit tax

FSDC proposals claim to talk about far-reaching financial reforms but the ideas merely smack of self-serving market distortions and conjecture

PUBLISHED : Tuesday, 03 December, 2013, 5:45am
UPDATED : Tuesday, 03 December, 2013, 5:45am

"You can't lose something you don't have," [Financial Services Development Council adviser Bill] Strong said. "If Hong Kong does not change the tax rules, overseas reits won't list in Hong Kong."

SCMP, December 2


Yes, Mr Strong, you can't lose something you don't have. But you can lose something you do have and that's what we would do with your proposals for abolishing profits tax on real estate investment trusts.

Let's get reits straight first. A reit is a tax dodge for property investment. It was invented in America and picked up elsewhere by copycat regimes that set great store by doing what everyone else does.

There are few listed real estate companies in the United States. Residential property consists mostly of standalone single homes, which do not require huge capital concentrations, while commercial property is largely held by big institutions such as insurance companies.

A reit gives the public access that it would not otherwise have to this sector. It is a property investment entity that is excused profits tax in return for paying out 90 per cent or more of its earnings as dividends, which are taxed at lower rates. For the US it is a grand way of bringing the public into property investment.

It's not quite so grand an idea in Hong Kong. Property investment and development is already the biggest domestic sector on our stock market, thanks to the peculiar nature of our property market, and the public is well represented in it. Why do we need reits then?

Ah, says Mr Strong, you need them because if you want to be a big swinging financial centre like Singapore or Sydney, you have to do what everyone else does or you won't get there. Be a copycat. That's the way to make your mark. Don't get left behind now.


We have tried reits, of course. What several property companies did at the time was package a line of duff properties along with one attention-getting prize building, wrapped the whole in ribbons, painted it pink, and offered it back to the market at a substantial premium to what the public would otherwise pay for it in the original property company.

The only one that ever really worked was the Link Reit and it did so only because the Housing Authority goofed and pumped the properties in at far too low a price. But you can't fool all of the people all of the time and our public has long seen through pink paint and ribbons.

Thus we have Mr Strong's big idea for giving it another try by abolishing profits tax for reits. I wonder why he bothers. It's obviously a non-starter. For one, it gives reits an absolutely unwarranted advantage over already listed property companies and they won't stand for it.

It also leaves us with no public revenue at all from reits. In other jurisdictions governments still collect taxes on dividends and capital gains. But Hong Kong does not tax these. Reits would become entirely tax-free commercial enterprises.

Great idea. Number me among those who don't like paying tax. But, Mr Strong, here is a question for you. Who would pay for public services then? Why should reits be tax free but clothes retailers and rice merchants not? What makes a reit special?

His answer is that we would more than make up for it through all the bankers and other professionals who would move to Hong Kong to run reits. He even mentioned attracting property analysts, this in a town that probably has as many of them as all of the United States.

The argument fails on two counts. The first is that it baldly makes this assertion but fails to support it anywhere in the position paper written on the matter for the FSDC.

I say it is just the usual conjectural nonsense with which private petitioners assail public officials.

Even if it were true, however, it is true of every economic sector. Tax forgiveness is a powerful economic stimulant to whatever industry it is applied. Why reits alone?

I thus say of these reit proposals what I said of the FSDC's paper on private equity in an earlier column. These people talk of far-reaching financial reforms but propose self-serving market distortions.