C-Suite Q&A

After two decades in the finance industry Derek Cheung felt the fallout of the 2009 financial crisis, eventually ending up in the reit business, where he sees strong growth potential in China

PUBLISHED : Wednesday, 15 April, 2015, 6:00am
UPDATED : Wednesday, 15 April, 2015, 4:25pm

In an age of overt government intervention in the finance industry post-global financial crisis, Derek Cheung Yat-ming found it difficult for an individual to work in the fund management business. After spending two years trying to establish a private equity fund, he left the finance industry - where he had spent more than two decades.

In 2013, he joined New Century Asset Management, the manager of New Century Real Estate Investment Trust, as chief executive, finding that the nature of the work was similar.

New Century Reit is the first listed China hotel reit in the world. Major unit holders are New Century Group, the largest privately owned hotel group in China, and The Carlyle Group, a global alternative asset manager with US$189 billion in assets under management.

"Reit is similar to a private equity fund," said Cheung, adding that both involve buying properties at a low price and selling them at the highs to reap profits and pay dividends to holders.

As part of the reit market in Asia, Cheung casts his long-term hopes on the outlook of the market on the mainland, even though no reit product has been launched there so far.

He urged Beijing to streamline the tax regime to let the investment vehicle take off.

How did you get into the reit sector?

After working as head of property research at HSBC Securities for about five years, I joined Cohen & Steers as chief investment officer in Asia-Pacific. But the market collapsed during the global financial crisis in 2009.

I left the company and joined DBS as head of research, and left the company in 2011 when the stock market improved. I left to raise a private equity fund, but it was not easy. The finance industry had been declining with numerous news of lay-offs by investment banks since 2012. And the overall market, influenced by government policies, is not easily predictable by economic fundamentals.

For example, China's economy is slowing but the A-share market is rising due to government policies and the capital is flowing into the Hong Kong stock market. You never know when the market's bubble will burst.

New Century Reit listed in Hong Kong in 2013 and reported a loss of 43.1 million yuan (HK$54.5 million) last year, against a loss of 146.86 million for the six months to December 2013. What is the company's growth potential?

For a reit company there are three areas to see business growth: organic growth of business, merger and acquisition, and yield compression.

Organic growth is limited as the hotel industry on the mainland remains difficult in the next two years. Demand shows signs of improving but supply is huge. The situation will be better after three years.

When we say the market is "difficult", it does not mean that it is bad. We are looking for opportunities to acquire quality hotel assets.

We offer distribution yield of 9.3 per cent, the highest among [our peers in] Hong Kong.

How does the central government's anti-corruption drive impact your company's business and the industry.

Definitely it brought a negative impact, mainly on the food and beverage businesses [which] account for a third of the reit's net profit. Our business strategy is to maintain stable organic growth by different methods such as cost cutting and increasing loyalty members.

What is the outlook for the mainland reit market?

As the population on the mainland is ageing, reits, which generate a steady income stream, can help the mainland fund the retirement of its ageing population and free up the central government's balance sheet. But there are structural bottlenecks that need to be removed such as the tax issue.

Do developers or property owners on the mainland want to list their assets via reits?

As far as I know, there is strong demand from China real estate owners to securitise their assets, but the [mainland] legal and tax system is not ready for them to do so. The need to pay a significant amount of capital gains tax is a big obstacle.

Now we see that the top-level leaders have long planned a reit market and developers also want to push ahead with the launch of reit products. But the middle level of government authorities such as the tax bureau and the China Securities Regulatory Commission have not yet put together a proper tax regime for reits to take off.

You also support the relaxation of reit codes in Hong Kong. How do you protect investors if the rules are relaxed?

Hong Kong reits are regulated by the Securities Futures Commission, whose codes are much tougher than those in the Hong Kong exchange.

Meanwhile, as almost 100 per cent of dividends are distributed to unit holders … we need unit holders' approval for every transaction. The investment risk is lower. As long as [there are] adequate disclosures and investor's education, investors should be able to make their own investment decision and any excessive risks undertaken by the reit management would be reflected in their unit prices.