Developer bets on higher risk for better returns and may beat the government-backed Link to market Cheung Kong (Holdings) is expected to gear its first local real estate investment trust (reit) to the maximum allowable 45 per cent of total gross asset value to take advantage of present low real interest rates, banking sources say. The move by Li Ka-shing's property development flagship, in a rising interest rate environment, would allow it to offer investors a yield of more than 5 per cent in an initial public offering that some analysts say may beat the relaunched, government-backed Link Reit as the first to list on the Hong Kong market. A banking source said that Cheung Kong had asked retail and investment banks for pre-offer financing proposals which may include loan arrangements, asset-backed securitisation or even a combination of both, depending on the terms offered. 'Gearing up to the full would make the asset valuation of reits more attractive but it makes the investments more risky, too,' said the source. He said interest rates may not remain at their current relatively low levels and may impact on long-term profitability. The Securities and Futures Commission in June increased the reit borrowing limit from 35 per cent to 45 per cent and decided to allow investment overseas by Hong Kong reits. It is understood the Hong Kong Housing Authority's Link Reit, whose trading debut is scheduled for November 25, is geared up to 35 per cent, or higher. It had 30 per cent gearing for its initial offer, planned for last Christmas before being derailed by a legal challenge. 'It needs high tactical skills for Cheung Kong to reach a deal with the banks amid an upward trend in interest rates. But even in doing so, it is not easy to entice local investors with a yield only in the low fives,' said the banking source. Brokers have said that the Link Reit would target a yield of at least 6 per cent and that one of the other two reits the SFC is said to be processing - Guangzhou Investment's $3 billion trust - could be as high as the mid-sevens. Sources say that the other reit in the pipeline is Gateway Corp's Beijing twin towers project, Gateway Plaza. The Hong Kong-based international conglomerate's development is located in the southeast of the capital's central business district, Yansha Bridge and once complete, will boast a total floor area of 141,075 square metres. HSBC Securities, the investment bank arm of HSBC, will act as the sponsor for Gateway Corp's listing, according to a banking source. Some observers have argued that it is unlikely Cheung Kong would deprive the government of an opportunity to be first in the market to list a reit locally. But analysts say that for issuers of high-yield products such as reits, early launches are currently of great importance, as issuers attempt to tap into strong investor appetite for yield before interest rates head even higher.