Hong Kong Reits need greater flexibility
The city has one of the world's largest retail-oriented operations, but lags behind some regional neighbours, including Singapore
The development of the international financial industry has been robust and rapid, and to maintain its position as an international financial centre, Hong Kong must align itself with market changes and strengthen its advantages in view of the rapid growth of wealth in Asia as well as market reform on the mainland.
By doing these two things, Hong Kong can enhance its role as an offshore yuan business hub and international asset management centre.
The launch of real estate investment trusts (Reits) in Hong Kong in 2005 marked a milestone in the development of financial products. A Reit is a collective investment scheme with clear business objectives that allows investors to share the benefits of investing as a group, benefits that include professional management, economies of scale, and diversification of investments.
Reits can invest in real estate only. Compared with direct investment in property, marketability and liquidity are higher. Therefore, Reits provide investors with an investment alternative to purchasing properties and investing in property-related stocks, allowing them to diversify their portfolios and capitalise on the development of the industry.
Simply put, a retail investor with as little as HK$44.45 (the closing unit price on May 7), can buy a unit of The Link Reit, and indirectly become a part owner of some of the largest retail assets in the city.
The development of Asian Reits has taken place only recently. The first was launched in Japan in 2001, and Hong Kong set up a regulatory framework. The listing of The Link in 2005 marked the birth of Hong Kong's Reit market.
As Hong Kong's first 100 per cent privatisation of a government asset, The Link has the mission of realising the growth potential of shopping centres and car parks by bringing more dining and shopping choices to customers to revitalise the communities where we operate.
The Asia-Pacific Real Estate Association (Aprea) published a research report last year, conducted by the University of Western Sydney, on the performance of Asian Reits.
According to the report, most delivered higher returns than their stock markets, with lower risk and superior risk-adjusted performance.
This was particularly evident during the global financial crisis, proving the defensive characteristics of Reits as an investment with a strong yield focus. Meanwhile, by calculating the correlation coefficients of Reits and other investment tools in the region, it was illustrated that Reits provided more diversification benefits than stocks and bonds.
The further development of regional Reits depends on the creativity and discipline of the industry to add value for customers and investors.
A good regulatory framework provides a suitable platform for continuous expansion.
In Singapore, for example, Reits enjoy relatively more flexibility. Apart from acquiring and renovating properties, they can use not more than 10 per cent of their assets to purchase land to build property for investment purpose.
As such, the Reit market in Singapore has developed much more rapidly than in Hong Kong, which remains the only developed market in the world without such flexibility.
Some of the properties under the management of The Link are up to 30 years old, and their renovation is subject to various restrictions. Therefore, demolition and redevelopment could offer greater benefits than renovation to tenants, shoppers and investors.
Singapore's experience provides a noteworthy example, and we hope authorities can consider adding more flexibility to the regulations for the development of Reits in Hong Kong to enhance their competitiveness in the international financial markets.
Reits are also heavy users of financial products and the expansion of this sector inevitably will provide increased demand for financial services from stock brokers to commercial and investment banks, which are the pillars of the Hong Kong financial market.
The Link was established only 7½ years ago, but we have already completed 26 renovation projects, enhancing shopping facilities to attract visitors, providing consumers with a more comfortable shopping experience, creating a more robust business environment for tenants, and providing a large number of job opportunities to local communities.
Recently, The Link began to acquire retail properties to serve more tenants and customers by utilising our expertise.
We are Asia's largest Reit and one of the world's largest retail-property-focused operations in terms of market capitalisation.
We remain motivated to succeed by the support we receive from our stakeholders, and we will continue to adhere to our business objective to improve Hong Kong's retail infrastructure as well as contribute to the development of the Reit and financial industries of Hong Kong.
George Hongchoy, chief executive, The Link Management