Regulations require investment only in Hong Kong property Property owners will be able to apply to sell assets through real estate investment trusts (REITs) from next week after the Securities and Futures Commission (SFC) announces the regulatory framework, according to a source familiar with the situation. After market consultation, the SFC has modified some of its original proposals but insisted on keeping the most controversial which requires REITs to invest only in Hong Kong property. Other sources said Cheung Kong (Holdings), Sun Hung Kai Property (SHKP), Swire Pacific and the Housing Authority were all likely to apply to launch REITs. A Cheung Kong spokesman would not comment last night, while an SHKP spokesman said it needed to wait to see the SFC rules and Swire could not be contacted. The Housing Authority last Friday announced it wanted to sell its 130 shopping centres and 100,000 carparks in a REIT-like company listed on the exchange in 2005. REITs are investment vehicles that pool property assets to offer a stable income flow from rents. Tax advantages and market pressure for firms to allocate capital more efficiently have been a driving force behind their development in markets such as the United States, while in Japan, banks needing to clear dead assets from their books have provided stimulus. In Hong Kong, property ownership is concentrated with family-controlled firms and individuals rather than investing institutions. However, deflation and low expectations of future rental growth mean property firms are finding it hard to raise fresh capital, providing an impetus for the development of a market in tradeable REIT securities. The SFC is facing competition pressure to move ahead with Hong Kong REITs after Cheung Kong last month applied to the Singapore regulator to sell five Hong Kong shopping malls via a REIT listed in the city state. The commission issued a consultation paper on REITs in March. In a change from its original proposals, it has now decided they must all be listed on Hong Kong Exchanges and Clearing (HKEx). 'This will make it easier for investors to exit their investments by selling the unit through the exchange. It will also enhance the transparency of the funds as they will need to make disclosure according to the listing rules,'' the source said. The SFC and HKEx will work together to approve the REITs. Another change to the original proposals is that REITs will now have to pay out 90 per cent of their rental income after expenses, instead of the suggested 100 per cent. The SFC has also reached a decision with Inland Revenue that REITs will pay 17 per cent profit tax instead of the 15.5 per cent property tax. The market called for the change because under the tax laws REIT managers could only deduct up to 20 per cent of their expenses if the funds paid property tax. If they pay the profit tax they will be able to deduct all expenses including mortgage interest payments and management fees. However, the source said Inland Revenue had agreed to the change only if the trustee is required to set up a 100 per cent-owned special purpose company to hold the properties in the REIts. While the SFC did not agree to lift the geographical restriction on REITs, it said it would consider a relaxation in the future. 'REITs are new to Hong Kong and the SFC does not want to see investors exposed to risk that is too high,' the source said. The source said China and other emerging markets had a lot of land rights problems and property owners often lacked legal protection. Florence Chan Yuen-lai, partner of Ernest & Young, said the tax change and requiring REITs to be listed made them more attractive. 'But the regulations will be still less flexible than those in Singapore which allows REITs to hold overseas properties,' Ms Chan said. 'This would stop overseas companies from using Hong Kong as a fund raising centre for REITs.' Property shift - B16
