These days, investing is all about income. Hardly a week goes by without the launch of some new income fund invested in bonds or high dividend stocks. The appeal is clear. With interest rates stuck at near zero and with share markets gripped by volatility, investors want safe, yield-generating instruments.
Enter real estate investment trusts (reits). Reits are vehicles that own real estate that generates a steady rental income used to provide predictable returns to unit holders. Reits, simply, are designed to generate yield and Hong Kong reits generate average dividend yields of about 6 per cent.
The reits discussed here are all listed. They trade like shares and are therefore easy to buy and sell.
Hong Kong reits have also had a good run, with their prices rising an average 89 per cent over the past three years; significantly outperforming the Hang Seng Index, which dropped 6.5 per cent over the same period. (See Table 1.)
That hits the zeitgeist. Hongkongers want steady returns, but they also want a bit of something extra - a bit of risk and upside - and reits fit the mood. They are not as dull as bonds, but they are not the sinkhole of equities, either.
There are several reasons why reits have performed so well. Most of the reasons are good news. But some give pause for thought. This article takes a hard look at the reits' hidden risks, and includes a breakdown of Hong Kong's main listed property trusts.
To begin, let's look at the positive aspects. Office reits have shown their resilience in recent years. Because the trusts involve properties with tenants that sign multi-year leases, their income tends to be stable even during downturns. Office reits also benefited from an upward trend in lease rates, as these are renewed. Office rentals rose above their pre-credit-crisis levels during the second quarter of 2011, according a Hong Kong Valuation and Rating Department index.