Proposal to relax reit restrictions finds support among some in industry

Change in investment rule would bring city in line with Singapore and Japan, say players

PUBLISHED : Thursday, 30 January, 2014, 5:01am
UPDATED : Thursday, 30 January, 2014, 5:01am

Some members of the real estate investment trusts industry are upbeat on the proposal to give listed reits greater flexibility to undertake development projects even though others have expressed reservations about it.

On Monday, the Securities and Futures Commission suggested relaxing restrictions on reits and started a one-month consultation on the proposals. These include allowing reits to invest up to 10 per cent of their asset value in property developments and letting them invest in financial instruments such as listed securities and overseas property funds.

"Some tax incentives and relaxations on development should help the Hong Kong reit sector to capture the next wave of capital inflow from the world's largest real estate investors," said Victor Yeung, the chief investment officer at property management company Admiral Investment.

Yeung said allowing reits to dabble in developments would allow them to achieve capital growth and put them at the same competitive level as reits from Singapore and Japan.

Peter Mitchell, the chief executive of the Asia Pacific Real Estate Association (APREA), said: "Hong Kong reits can only acquire investment properties already in the market and are forbidden from building their own assets. The capacity to invest early in the project cycle would create pricing advantages and would also give reits control over the final product."

"Permitting a degree of development activity in itself will not make reits more risky," he said, adding that such restrictions did not apply in the US, Australia, Singapore and Malaysia.

Mitchell's view contradicts that of Justin Chiu Kwok-hung, the chairman of Fortune Reit, who said earlier this month that allowing reits to undertake development projects would add an element of risk to their investment status since their incomes would fluctuate.

Fortune Reit, controlled by developer Cheung Kong, has made a written submission to the government to express its opposition to the proposal.

"When the trusts were launched in 2008, they were created with the aim of seeking stable returns. Therefore, the idea of allowing them to invest directly in developing properties is wrong," Chiu said.

Yeung cited an APREA survey that found more than 70 per cent of investment managers expected their assets under management in Asia-Pacific reits to grow in the next two years, with about 60 per cent forecasting their clients to increase allocation to the sector. "Hong Kong can capture this additional capital source if it provides incentives for its reits to grow," he said.