A Perspective on Hong Kong REITs
Because of the depth of the capital market, Hong Kong is attractive and the first choice to the developers in the mainland, especially after SFC loosen regulations on REITs. After the Securities and Futures Commission ("SFC") announced in Oct. 2005 the revised Code on Real Estate Investment Trusts, the door to REIT in Hong Kong is open. In summary, the revised Code on REITs includes the following significant revisions:
1. allowing REITs to hold real estate through wholly owned special purpose vehicles;
2. reducing the dividend payout ratio to 90 percent of net after-tax income instead of 100 percent;
3. reducing the valuation frequency to an annual basis;
4. mandating the listing of REITs on the Hong Kong Stock Exchange;
5. expanding the type of investable real estate to include hotels and recreation parks; and
6. providing additional measures on corporate governance.
Relaxed REIT rules had spurred developers' interest in realizing the value of their properties to which foreign investors otherwise had only limited access. Now considered an effective investment tool in Hong Kong, REITs are expected to be a primary focus in 2006.
There are three REITs listed in 2005. No. 1 is Link REIT, the world's largest property trust IPO, which is listed in 25, Nov., 2005 and held by Hong Kong Housing Authority, its equity assets include Shopping malls and car parks that are on the doorstep to 40% of Hong Kong population. The second REIT is Prosperity REIT (code: 0808), held by Cheung Kong (Holdings) Ltd., the largest property developer in the territory. Prosperity REIT is comprised by seven properties which include high-grade office buildings in North Point, the Metropolis Tower at Hung Hom and industrial structures in Kwun Tong. GZI REIT (code: 0405), the third and also the first PRC-based REIT, which listed on the Main Board of the Hong Kong Stock Exchange on 21, Dec., 2005 and launched by Guangzhou Investment, has more important significance than the formers.
GZI REIT is also the first REIT to invest in Southern China and the assets comprise a portfolio of four prime commercial properties in Guangzhou. As the first China REIT, the institutional tranche of the IPO was 145 times subscribed and the retail tranche was 495 times covered. The official IPO price is HKD 3.075 with 583 million shares issued. The REIT expects to make a distribution per unit of HKD 0.201 for the 2006 fiscal year i.e. a yield of 6.54%, which is higher than Link and Prosperity REITs' yield of just over 4%.GZI REIT offers a 100 per cent dividend payout for the fiscal years from 2006 to 2008.
It is well known that in response to market pressure on Renminbi and to beat back hot money from the oversea, China government take many measures to regulate and control the real estate market in the mainland, especially in Shanghai city. Government's policy and regulations have a heavy and major effect on the real estate industry. The price come down as demand, however, the developers find that to arise money from banks is more difficult than in the past days. The developers realize they must seek new finance channels for themselves. Investors need an instrument that generates a steady income stream and gains in underlying assets; REITs can provide that, in the meantime the developer can raise money by launching REIT. The value of REITs in Asia, excluding Australia, has grown to about US$38.3 billion (HK$298.7 billion) since 2001. Hong Kong, Malaysia, Singapore, South Korea and Taiwan amended laws in the past five years to ease REIT sales.
Hong Kong is widely recognized as the leading fund management centre in Asia with the largest concentration of fund managers. Three property trusts debuted in Hong Kong in the last two months of 2005, raising a combined US$3.1 billion. There are at least seven potential REITs in the list which is waiting for final launch. Some of the developers in the mainland declare they are studying the idea of a real estate investment trust, even government officials are talking about the advantages of REIT in public. But, the main worry is that there may not be that many projects which have clear property rights and legal land sales that can offer such high yields in China. It is not known how many China REITs will be launched in Hong Kong this year; we can believe that investors will judge each REIT on its merits.
