New Hong Kong REIT Rule May Free $4.4 Billion for Development

By Bei Hu

Photographer: Jerome Favre/Bloomberg

REITs will be allowed to invest as much as 10 percent of their gross asset value in... Read More

A change to Hong Kong’s real estate investment trust rule may free HK$34 billion ($4.4 billion) for property development and rebuilding, according to Victor Yeung, who runs Admiral Investment Ltd. that invests in REITs.
Of the amount, HK$27 billion could come from trusts with Hong Kong assets, Yeung, a former managing director at LaSalle Investment Management, said in an e-mail response yesterday. Hong Kong-based Admiral is seeking $200 million for a fund to invest in regional REITs.
REITs will be allowed to invest as much as 10 percent of their gross asset value in property development or redevelopment, Hong Kong’s Securities and Futures Commission said in a statement posted on its website July 22. Existing rules effectively barred REITs from engaging in property development and redevelopment, unlike in most other markets with REITs regulations, according to a statement from the Asia-Pacific Real Estate Association yesterday.

“This is a positive step by the SFC that will place Hong Kong REITs on a more competitive footing with other countries,” the association’s chief executive officer, Peter Verwer, said in the statement on the easing of restrictions that will also allow REITs to invest in financial instruments.
Hong Kong has lagged Singapore, Australia and Japan in both the number of REITs listed and their market value, said Yeung. The restriction on investment in development was one central reason holding back growth in the city’s REIT market, he added.

Link REIT

Hong Kong has 10 actively traded REITs, according to data compiled by Bloomberg. The market value of REITs in Hong Kong stood at $17.2 billion at the end of 2013, compared to $71.2 billion in Japan and $40.3 billion in Singapore, according to an April paper released by the association.
Hong Kong issued rules allowing REITs in 2003 and the Link REIT (823), which owns neighborhood malls, food markets and car parks, became the first such trust to list in the city in 2005, according to the SFC and data compiled by Bloomberg.
The earlier restrictions were imposed to ensure REITs mainly invested in income-generating properties and because real estate development may require different skills from REIT management, SFC said in its January consultation paper on the rule change.
Allowing REITs to invest in redevelopment of their existing assets as they age will potentially be more important, Yeung said. Otherwise, REITs will either have to manage an older and thus less competitive portfolio or sell the older assets to someone else for redevelopment, he added.
When REITs participate in property development, they are in general required to hold the properties for at least two years after completion, SFC said in the latest statement.