Theme parks, hotels and government assets can be listed The government, theme park operators and hotel owners will be able to issue real estate investment trusts (REITs) under a revised regulatory code announced yesterday by the Securities and Futures Commission (SFC). The announcement paves the way for the government to use REITs to help solve the budget deficit - estimated to reach $68 billion this year. It also gives hotel owners a new way to raise capital after their businesses were hit hard by the drop in tourist arrivals due to the Sars outbreak. After announcing the revised code yesterday the SFC said it would immediately begin accepting applications from property owners. SFC executive director Alexa Lam said a number of companies had shown interest in issuing REITs, adding the first applications could be approved within 30 to 35 days. After accepting market comment, the SFC made a range of revisions to its March REIT proposals, including: allowing them to pay a lower tax rate; relaxing rules on management companies; reducing dividend payouts from 100 per cent to 90 per cent; and requiring that all REITs be listed. The commission, however, did not agree to lift a controversial rule allowing REITs to invest only in Hong Kong property. 'The SFC will maintain the restriction as its primary objective is to give investors an additional product through which they can participate in investment in the Hong Kong real estate market,' it said. 'Hong Kong investors are already familiar with the local property market, which has in place a clear and robust legal framework for property ownership.'' The SFC, however, agreed to expand the type of properties allowed to be included in REITs. Its March consultation paper, allowed only property with stable income - such as carparks, shopping malls and office blocks. But the SFC has extended this to include hotels, recreation parks and serviced apartments. Mrs Lam said investors should take note that such properties had less stable income. 'The Sars outbreak showed the income of hotels and parks can fluctuate. These risks must be clearly explained in the prospectus.' The revision has led to market speculation that the government may use REITs to dispose of civil servants' apartments or Ocean Park. Mrs Lam refused to confirm whether the change was related to the government's asset disposal plans, but said unfinished property projects would not be eligible as they were not earning income. This means the government would not be able to dispose of its stake in the Disneyland theme park still under construction. Morgan Stanley head of corporate finance Liu Che-ning said overseas governments used REITs to dispose of assets and Hong Kong might follow suit. 'The government has a lot of civil servants' apartments. It also has a lot of assets with rental income. These properties could be sold via REITs to solve the deficit problem,'' Mr Liu said. The Housing Authority recently announced a plan to sell off $20 billion worth of shopping centres and carparks through a REIT-like company in 2005.