Hong Kong real estate investment trusts are borrowing from the future to spice up rental returns from office buildings that are not earning enough to attract buyers at today's inflated property prices.
It is legal and investors have been warned. It is there in black and white in the prospectus of Champion Reit, a spin-off of Great Eagle Holdings. But it is a telling sign of how risk-hungry Hong Kong investors are and it means that the staid, steady old reit has been jazzed up into a tool for punters who want to speculate on Hong Kong's rent market, which means more risk.
'[Rental yields] are expected to increase going forward but interest costs will also be higher. So if rents don't go up, you could see an earnings gap as you go out,' said Milton Low, a portfolio manager at Prudential.
Reits came into being in the United States when property owners had trouble getting financing because banks were undervaluing real estate. So the owners sold the property on the public market to get a better price and smart investors realised that the rent from the properties would deliver a steady return on investment at those selling prices.
In Hong Kong, the exact opposite is the case. Property prices are high in relation to rents so companies wanting to sell their buildings on the public market are forced to devise a short-term solution to make their yields more attractive.
'What's disturbing here in Hong Kong is the need for financial engineering to get a high enough yield because yields in Hong Kong are so low,' said Steve Buller, the global head of Fidelity Investments' property funds. 'To get a competitive yield you may have to do it with financial engineering, which is borrowing from the future to pay a higher dividend.'