Hong Kong's reit market held back by tight regulatory code, says manager

PUBLISHED : Wednesday, 15 April, 2015, 6:00am
UPDATED : Wednesday, 15 April, 2015, 6:00am

Hong Kong regulators should further relax the regulatory code for real estate investment trusts (reits) to build up a successful reit market comparable to that of Western countries, according to Derek Cheung Yat-ming, chief executive of New Century Asset Management which manages New Century Reit.

"To make reits competitive as an investment product, they should be compensated for being under stricter regulations and supervision and having lower business flexibility. Otherwise, they will continue to be among the least favourite choices for sponsors and investors," he said.

Cheung said if Hong Kong was determined to grow the reit market it needs to ask two questions. First, why should property owners list their assets in the form of reits in Hong Kong? Second, why should investors invest in Hong Kong reits?

Having experienced slow reit development in the past decade, Hong Kong needs to address these questions more urgently than any other reit market in view of the pending US interest rate increase, which would undermine reit's attractiveness for investors and slow the pace of their market development, said Cheung.

He suggested tax advantages for reits to aid higher distribution for unit holders and easier asset acquisition.

Cheung also called for the Hong Kong government to liaise with the mainland government to provide more opportunities for Chinese property owners to list their real estate assets in the form of Hong Kong reits, which will benefit not just the Hong Kong reit market but also the China real estate market and financial system.

Allowing Mandatory Provident Fund money to invest in reits is another option.

Cheung said the latest reit code changes were moves in the right direction but were not enough to encourage more reit initial public offerings or help Hong Kong reits to grow more rapidly than their competitors.

The legal framework for Hong Kong reits was established in 2003 when the Securities and Futures Commission (SFC) announced the Code on Real Estate Investment Trusts.

Since then, the SFC has twice relaxed restrictions on reits. The first change, in 2005, allowed reits to invest in properties outside Hong Kong. The SFC also lifted the borrowing limit of a reit from 35 per cent to 45 per cent of gross asset value, which allowed for more flexibility in managing a reit's asset base and its balance sheet.

The second relaxation came in September 2014, allowing reits to invest up to 10 per cent of their asset value in property development.