The idea behind the Link real estate investment trust (reit) looked dubious last year. Now that the Court of Final Appeal has finally cleared its launch, the concept still looks fishy.
In one way, it appears even worse. One of the reasons given for the Link's original listing, before it was hastily cancelled last December, was that the trust's launch would kick-start a reits' market in Hong Kong.
That argument has evaporated. Since the Securities and Futures Commission published new regulations governing the sector last month, a clutch of private sector issuers have begun queuing to float their own property trusts on the stock exchange.
If the Link is now listed before the end of the year, as Housing Authority Michael Suen Ming-yeung hopes, it could well be the third or even the fourth reit to reach the Hong Kong market.
So, if the Link is not going to act as a government-sponsored trailblazer for a new investment market, it will have to stand on its own merits. Unfortunately, these look pretty thin.
The Link was originally proposed to allow the government to kill two birds with one stone. By selling off its shopping centres and car parks, the Housing Authority would be able to raise cash to plug its budget deficit. At the same time it would be able get out of the commercial property management business and refocus on its core task of providing low-cost housing.
But although plugging deficits and getting the government out of business are laudable aims, it was never clear that launching a reit was the best way of achieving them.
For a start, although the Housing Authority lost its main source of income when the sales of Home Ownership Scheme (HOS) flats were suspended in 2002, it is not short of cash. At the beginning of this financial year, the authority had reserves of $13 billion, more than enough to tide it over until HOS sales are scheduled to resume in 2007.
In short, there is no financial imperative compelling the sale of the authority's commercial assets. Of course, selling off the shopping centres and car parks would get the government out of the property management business, but the authority should be obliged to get the best price it can.
One of the other arguments advanced for launching a reit was that the Housing Authority is a bad manager of retail properties and that a private sector manager would be able to earn a far better income from the portfolio simply by being more efficient, without even having to raise rents.
It is probably true that the government is an inefficient property manager. But it makes little sense for the Housing Authority to sell off its assets, only to watch a private sector company restructure the portfolio to earn a higher yield.
It would be far better for the authority to retain ownership, contract out the portfolio's management to the private sector, and collect the higher yield itself. After all it could always sell the assets later anyway, and having demonstrated their yield potential, it would get a better price on the sale.
The underwriters of the original Link sale estimated that the $22 billion portfolio should bring in an annual yield of 7 per cent. If the trust is now offered again at the same sort of yield, its market price would likely adjust over time to align with other similar vehicles, like the Singapore-listed Fortune reit, which is currently yielding 5 per cent. In other words, the Link's stock price would shoot up by 30 per cent or more.
It would be ludicrous for the authority to sell good assets at a 30 per cent discount when it does not need the money. It would be even worse if it is only going to park the proceeds in the money market for a return of about 3.5 per cent when it could be earning twice that on the assets themselves.
Of course, what is a lousy sale for the vendor is a great deal for the buyers. No wonder half a million investors flocked to the original issue last December.