Hong Kong reits looking ahead to rosier times

Market slowdown provides acquisition targets for real estate investment trusts, analysts say

PUBLISHED : Wednesday, 19 November, 2014, 4:36am
UPDATED : Wednesday, 19 November, 2014, 4:36am

Hopes are being raised over the development of the city's real estate investment trusts following the latest transactions in the sector.

Analysts expect the importance of the reits sector to grow as the slowdown of the mainland property market will create considerably more acquisition opportunities for market players.

"If companies owning mainland property assets come to Hong Kong to list, it will also enlarge the sector," said Victor Yeung, the managing partner of real estate fund management firm Admiral Investment.

Yeung's high hopes for the sector come as the Link Real Estate Investment Trust, the largest reit in Asia, announced it had signed a non-binding letter of intent in relation to the acquisition of an 80 per cent interest in Shenzhen Longgang Vanke Plaza and car parks under China Vanke, the largest mainland developer in terms of sales.

"They may not only buy one project," said Yeung. "They may acquire a number of shopping centres to enlarge economic scale."

He said the slow mainland property market also created opportunities for reits to grow.

"Landlords on the mainland are suffering from tightened credit and are more willing to offload assets," he said. "On the other hand, private equity funds and investors have become less aggressive in buying amid a slow market."

That created opportunities for reits, whose acquisition decisions were based on steady income, he said.

"Generally, the reits sector expands in a down market. We saw the expansion of the sector in Australia when the property market slowed in the 1980s and the slow market in Japan since the 1990s," Yeung said.

There are 11 reits listed in Hong Kong, with some focused on mainland properties such as Hui Xian Reit, Yuexiu Reit and Spring Reit. Others such as Sunlight Reit, Fortune Reit and Champion Reit mainly focus on commercial properties and hotels in Hong Kong.

"The Link Reit's inclusion in the Hang Seng Index is also a sign of growing recognition of reits," Daiwa Capital Markets said.

As the Link Reit has a 100 per cent free float, its weighting in the Hang Seng Index was one of the largest of the Hong Kong property stocks, Daiwa said in its report last week.

With acquisitions, the reits' market capitalisation has continued to expand and now stands at US$24.9 billion, which Daiwa sees as no longer a small sector.

The latest purchase is Hui Xian Reit's 3.91 billion yuan (HK$4.95 billion) acquisition of Chongqing Metropolitan Plaza from Cheung Kong (Holdings) and Hutchison Whampoa.

Yeung said the Hong Kong government had recently been making efforts to stimulate the sector.

The Securities and Futures Commission in August announced the relaxation of a revised code on reits that allows them to have some involvement in development activities, which should expand the set of investment opportunities available to reits.

Reits are currently allowed to make investments in commercial and residential properties in Hong Kong and on the mainland.