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Enoch Yiu

Regulation and enforcement  require extra vigilance from securities watchdog

With the increasing popularity of real estate investment trusts, the city's securities watchdog has been brushing up on its regulatory powers and boosting its headcount to handle the screening of listing applicants and their regulation.

Securities and Futures Commission executive director Alexa Lam said six posts were created this financial year to look after reits.

One of the major concerns for regulators is related to news reports or market rumours about certain property developers indicating they had plans to launch reits.

These have boosted their share prices, even though these companies have yet to submit their listing applications with the SFC.

Chim Pui-chung, the legislator for the financial services sector, said the SFC should check if such premature disclosures constituted malpractice. This way, regulators could prevent a repeat of the stampede for concept stocks, as was seen during the dotcom bubble in 2000 or the red-chip craze in 1997.

'The SFC should perform its duties to check if there's market manipulation behind these rumours,' Mr Chim said. 'Small investors may be easily misled, so it is vital for the regulator to prevent someone profiting from  market manipulation.'

Ms Lam said the SFC had done its part to protect the interests of small investors, adding  the commission had  taken note of many newspaper reports relating to planned reit listings.

'The share prices of some listed companies appeared to have appreciated on the back of the news reports,' she said. 'It is premature to deduce anything or draw any conclusions at this stage. However, investors should exercise caution in their dealings.

'The SFC is closely monitoring the situation. We will not hesitate to take regulatory actions in cases of market misconduct.'

Ms Lam said investors should not rush into buying stocks of companies which had announced plans to list reits, as there was no guarantee that the SFC would approve their  applications.

'The SFC authorises the reit's application only if it can  satisfy the commission's code on reit requirements, including ownership of good marketable, legal title on the subject properties, a viable business model, and adequate disclosure of relevant and material information about the reit's operations in the offering circular,' she said.

Also,  reit managers must be properly licensed by the watchdog. One  requirement is that they must have a five-year track record.

'The SFC also looks into the corporate governance structure and internal controls of the management companies,' she added.

Most fund managers were satisfied with the SFC's regulatory regimes for reits, said Sally Wong, an executive director of Hong Kong Investment Funds Association.

'The regulatory framework for reits in Hong Kong is robust and accords the industry the necessary flexibility to develop products,' she said. 'This is especially so with the lifting of the geographical restrictions on overseas investments last June, so that reits may invest in real estate anywhere in the world - this is a very important step.'

Before that move, local reits could only hold Hong Kong properties. Many market players blamed this restriction for the slow start of reits here, even though the first code  was established three years ago.

However, some observers said the relaxations had added some risks to locally listed reits.

Stephen Cheung Yan-leung, the chair professor of finance at City University, said the regulator must be extra vigilant with reits holding overseas properties.

'If the properties in a reit are in Hong Kong, investors can simply conduct an onsite check  before making an investment decision,' Mr Cheung said.

'But if the properties are in China or in other parts of the world, it would be hard for local investors to get a good idea of their value.  It would be difficult - if not impossible - for investors to fly overseas to check the properties themselves.'

He said the SFC must ensure that developers and reit managers accurately reported the true value of their overseas properties.

At the end of the day, however, Ms Lam said it was up to investors to scrutinise the offering documents to identify potential risks.

'The risks include adverse potential changes in the property market and economic conditions, or a change in the interest rate environment. Political uncertainty or currency fluctuations could also affect the value of the property.'

Mr Lam said investors should also beware of reits that had all their assets in one market, or just a few properties.

'Investors should also check whether special features have been incorporated - if the return is guaranteed or not, how long the guarantee period is, and the investment strategies and future plans of the [reit] manager,' Ms Lam said.



Rush to list finds SFC stepping up manpower needs