Hong Kong and the mainland's healthy tourism sector are providing calculated expansion opportunities for the city's first hotel-backed real estate investment trust listed in Hong Kong. According to the management team of Regal Real Estate Investment Trust, a spin-off of Regal Hotels International Holdings, Hong Kong's robust tourism industry coupled with sustained mainland tourism growth is creating the momentum for growth. Regal Portfolio Management and its chief executive, Kai Ringenson, said the company's acquisition target over the next four to five years was to add 10 to 20, four- and five-star hotels catering for the commercial and leisure markets in key cities and tourist centres primarily on the mainland. Regal is one of the largest hotel owners by number of rooms, providing unit holders with exposure to the growing Hong Kong tourism and hotel industry. Regal's investment portfolio consists of five hotels with a total of 3,542 rooms. Regal Reit's principal strategy is to focus on hotel- and hospitality-related properties but the company is also looking at expanding its holdings into commercial properties and non-residential real estate in Greater China. 'Our primary objectives are to provide stable and growing distributions to unit holders and secure long-term capital growth in the value of the units. We intend to achieve these objectives through active ownership of hotels and strategic investment in hotel and hospitality-related properties,' Mr Ringenson said. He said fundamentals in Hong Kong's hotel industry were expected to remain strong with high occupancy levels and rising room rates driven by overall strong economic growth prospects, an expected increase in the number of business and leisure travellers and long-term growth in room demand, which is expected to exceed supply for hotel accommodation. Looking at the wider horizon, Mr Ringenson said the management team had been reviewing several hotel investment proposals on the mainland and would continue to identify further potential targets that suited Regal Reit's defined investment criteria. 'We are particularly interested in larger hotels in prime locations in the mainland's first-, second- and third-tier cities. We are also looking for opportunities to add value through renovation and more efficient management or rebranding in line with Regal's property and service standards,' Mr Ringenson said. Only properties that met Regal's investment criteria would be considered. 'At the moment we are seeing high and in some cases unrealistic pricing for properties driven by the China growth story and attention linked to the Beijing Olympics.' However, despite Hong Kong investors' well-known passion for property investments, market players - retail and institutional - may have let the niche hotel reit investment opportunity bypass their investment radar screens. Mr Ringenson said challenges facing the reit included creating investor awareness and investor education, expanding acquisitions and emphasising the reit's asset management team's in-depth understanding of hotel business. Mr Ringenson said that from an investor perspective Regal Reit should be viewed more for its high yield and stable income than as a hot, exciting growth story. The yield was expected to rise to about 8 per cent this year and 8.5 per cent next year, supported by a 10 per cent per year rental growth and higher occupancy rates as the number of tourism arrivals in Hong Kong continued to grow. 'My feeling is that investors have been focused on initial public offerings and have overlooked what I consider to be an investment gem,' he said. To satisfy the reit code requirement that a reit should generate recurrent rental income, Regal Reit has entered into long-term lease agreements granting operating leases in return for base rent and variable performance-related rental payments. The properties are managed by the lessee and hotel manager - both companies are part of the Regal group. The revenue structure is designed to shelter the reit from the day-to-day fluctuations in hotel room occupancies and rate variations. The reit receives fixed income based on the leasing agreement and is also positioned to receive additional upside revenues generated by profit sharing. Regal expanded the number of rooms in four of its Hong Kong hotels last year by adding 194 rooms, which came on stream during the last quarter. The investment and refurbishment initiative increased accommodation in the Regal Hong Kong Hotel and Regal Oriental by about 12 per cent. In both cases, the capacity was increased with superior guest rooms to boost room rates.