Reits aiming to cash in on relaxation of rules

PUBLISHED : Wednesday, 22 January, 2014, 4:34am
UPDATED : Wednesday, 22 January, 2014, 4:34am

Participants in Hong Kong's real estate investment trusts (reits) believe last week's policy address signalled that rules governing the sector are likely to be relaxed.

In his address last week, Chief Executive Leung Chun-ying said the Financial Services Department Council had submitted several policy proposals covering a range of issues, including the regulation of the reit market.

The council recommended rental incomes accrued to reits should be exempt from profit tax.

It also recommended that reits should be allowed to invest 10 per cent of their total assets in "design and build" properties and that the current rule limiting Mandatory Provident Funds to investing a maximum of 10 per cent of their assets in reits should be scrapped.

The Asia Pacific Real Estates Association (APREA) supported the proposed changes.

George Kwok-lung Hongchoy, chairman of the Hong Kong Chapter Board of the APREA and chief executive of The Link Management, said: "The most challenging will be the suggestion that the government should exempt reits from paying profit taxes on rental income. But it is also the most significant proposal. The government will earn increased revenue in the end if the reit market is able to grow."

Karl Choi, an analyst at Bank of America Merrill Lynch, echoed this view, noting that the profit tax levy was the major difference between the reit markets of Hong Kong and other countries.

"The Hong Kong reit market will benefit from a profit tax exemption, although my concern is that the government may not be able to afford to grant a full exemption as it would lose a major source of revenue.

"The realistic way is to reduce the tax rate from the existing 16.5 per cent to 13 to 14 per cent."

Hongchoy disagreed with the critics who warned that the proposal that reits may be allowed to invest in development projects would lead to increased investment risk for the sector.

"The proposal is not to allow them to develop something and then immediately sell it. Reits will need to hold the completed property for at least two years," he said.

There are nine reits listed in Hong Kong, compared with 28 in Singapore and 16 in Malaysia.

Hongchoy added: "Meanwhile, the pool of pension money is growing in Asia, and this is an opportunity for Hong Kong to lure more reits to list here."