The Housing Authority has approved a plan to divest its retail and car-parking facilities to generate revenue. Under the plan, the authority will transfer the ownership and management of the properties to a new company, which will be listed on the Hong Kong stock exchange through an initial public offering in 2004/05. After the IPO, the authority will not hold any shares in the new company. The divestment of the authority's commercial facilities, including retail properties of one million square metres and 100,000 car-parking spaces, will enable the authority to focus on its primary mission of providing subsidised housing for people in need. The move is consistent with the government's commitment to 'free market' and 'small government', says Housing Authority chairman Michael Suen Ming-yeung, who is also Secretary for Housing, Planning and Lands. Proceeds from the divestment, initially estimated at more than $20 billion, will generate substantial revenues and help the authority to tide over its serious financial difficulties until 2007. This would give the authority a chance to pursue a range of cost-saving initiatives to achieve financial sustainability in the longer term, Mr Suen says. The authority is faced with a cash flow deficit each year. Its cash balance is forecast to decrease from $28 billion in April this year to minus $5.5 billion in March 2006. This is the result of a cessation of sales of the authority's Home Ownership Scheme and Tenant Purchase Scheme flats, following a major shift in government housing policy in November last year. Although entitled to 50 per cent of the net operating surplus generated from the authority's non-domestic operations, the government has agreed in principle to allow the authority to retain all net proceeds from the divestment. Under the divestment strategy, the company to be established will have features similar to those found in a real-estate investment trust (REIT). These include a focused business strategy; a clear dividend policy that pays out the majority of the net earnings; a conservative gearing policy; and restrictions on speculative development. This will enable the IPO to fetch a price close to the company's net asset value, unlike an IPO of traditional property companies, where shares are usually offered at a substantial discount to asset value. 'The strategy is desirable, considering the higher proceeds to be generated from the divestment and its minimal impact on the local property market,' Mr Suen says. 'We will not rule out the possibility of establishing a REIT instead of a company with REIT-like characteristics, after regulations governing REITs are promulgated,' he says. While contemplating the merits of the divestment, the authority is mindful of its effects on about 700 Housing Department staff who are involved in managing the retail and carpark facilities, as well as the authority's 15,000 commercial tenants and 600,000-plus domestic tenants. The department will work with staff in developing appropriate arrangements for re-deployment to other duties and for joining the new company. Commercial and domestic tenants are likely to benefit from the change to private ownership and management of the facilities, as it will bring about enhanced quality, improved services and faster response to customer demand.