Last month's launch of Hong Kong's first yuan-denominated real estate investment trust made headlines for its part in the steady globalisation of China's currency, but the Hui Xian Real Estate Investment Trust listing otherwise failed to excite the market.
The offer's public tranche was oversubscribed a mere 1.3 times, which suggests that average retail investors remain unconvinced of the benefits of reits, whatever the basic pitch in terms of stable dividend yield, currency play or long-term asset appreciation.
That's a genuine puzzle to reit managers and sector analysts. The usual explanation is that Hong Kong retail investors, conditioned to prefer growth equities over yield stocks, still see reits as 'kind of boring'. But that ignores an option that gives defensive solidity to a portfolio and reliable dividend income, a combination that institutional and overseas investors don't readily understand.
Indeed, Christina Ngai, associate director with BOCI (Bank of China International) Research, is prepared to say that 'reits are getting hot'. She points to regular payouts, stable organic growth and the chance to benefit from a property market seeing rental increases and soaring demand for retail and office space. Occupancy of hotel rooms and serviced apartments is also on the rise, buoying income for those sectors, too.
With Securities and Futures Commission regulations requiring the current nine Hong Kong-listed reits to pay at least 90 per cent of net income after tax to investors, prospective returns look healthy, Average yields, or distribution per unit, this year are forecast to range from 4.5 per cent for The Link Reit to 6.9 per cent for GZI Reit, whose holdings are mainly in Guangzhou.
The unit price appreciation in a bull market may not match that of property developers or other more exciting stocks, but last year still saw an average gain of about 20 per cent for locally listed reits.
The price of one of the top performers, Prosperity Reit, which has seven office and industrial buildings in Hong Kong, rose 32.3 per cent last year. And with contracts securing rental income for two or three years, transparent management, and investment put into upgrading portfolios, the view gaining ground is that reits present a much better 'safe and steady' option than low-interest time deposits or government bonds.
'You have less downside than other equities, stable returns and, in the current environment, it is better than just keeping your money in the bank,' Ngai says. 'The unit price movement is unlikely to be volatile, and, though it is hard for management to improve liquidity, they can improve the assets with redecoration and restructuring or by adding to the portfolio.'
Such moves are a sign that reit managers, as a group, have come to terms with their product and potential investors, after an assortment of missteps early on. This led, in particular, to perceptions that some issuers and their backers were using too much financial engineering to colour initial yield projections, causing an understandable degree of investor scepticism.
The focus is now squarely on performance, with lengthening track records to guide strategy, claims and forecasts. 'A mix of multinational firms and small-to-medium-sized enterprises is optimal for our tenant base,' says Mavis Wong, acting chief executive of Prosperity Reit. 'We achieved an overall occupancy rate of 99.5 per cent at the end of December 2010 and had a close to zero delinquency rate [for the year].'
She notes initiatives, too, such as establishing a tenant relations team, implementing green features and organising social functions, which are all designed to add long-term value. Since reits are essentially restricted to a single source of income - rent payments - these measures serve as both a sales tool and a hedge against downturns in broader market conditions.
'[We have also] been participating in investor conferences and non-deal road shows in Hong Kong and overseas,' Wong says. 'It is good investor relations practice to meet our unit holders via different channels, and holding presentations overseas allows the company to extend its reach and tap into a larger pool of institutional investors.'
Wong says a continuing objective is to find acquisition opportunities with good transport networks and the potential for rental growth. She predicts that, given Asia's strong economic fundamentals and current low interest rates, more mainland-themed reits are likely to be listed in Hong Kong along with more dual listings, such as Fortune Reit, which is also traded in Singapore.
'This will attract more attention from the investment community to this sector,' Wong says.
Jeff Yau, an associate director at DBS Vickers Securities in Hong Kong, says if competition for listings increases, calls for tax concessions might also intensify. The 20-odd reits listed in Singapore benefit from favourable tax treatment at both corporate and unit holder level.
Yau doesn't advocate special treatment in Hong Kong, indicating instead that reit managers must create their own advantages by possibly improving leasing strategy to enhance revenue.
What are they?
Real estate investment trusts (reits) are shared investments in property, which trade on stock exchanges. They give investors the ability to own property but make it easy to trade out of the investment. Because property derives most of its value from rental income, which is usually locked in through leases, reits tend to be yield products with stable distributions, but low growth.
Risk factor: moderate