Hong Kong government mandates first Reit

The HK government''s housing arm picks three trusted banks to lead its IPO.

Hong Kong's Housing Authority (HKHA) has appointed UBS, Goldman Sachs and HSBC as joint global coordinators for what could be Hong Kong's first real estate investment trust (Reit). JPMorgan has been appointed as financial adviser.

The mandate comes as little surprise given the relationship the three have developed with the Hong Kong government in recent years. They acted as joint global co-ordinators for the government's last divestment - the privatization of the MTR Corp in the autumn of 2000 and have a mandate for MTR 2, which remains on hold.

HKHA is divesting a large portfolio of retail and car parking facilities in a deal that is expected to raise over HK$20 billion ($2.6 billion). So far it has only confirmed that HKHA will sell the facilities to a new company, which will than make an IPO on the stock exchange. Market sources are nevertheless optimistic that the authority will opt for a Reit.

The authority approved a plan to sell one million square metres of retail properties and 100,000 car-parking spaces in July 2003. Since then it has been advised by UBS with regard to the strategy for divesting the assets. The appointment of the global coordinators marks the end of that advisory stage and the start of the divestment, marketing and underwriting of the assets, which is expected to last well into 2004. The market expects the Reit will list no earlier than the second half of 2004.

An alternative to a Reit, in Hong Kong at least, is a company with Reit-like characteristics, which is restricted in its articles of incorporation to behave in a similar fashion to a Reit and listed on the stock exchange. Either way, the properties are expected to generate sufficient income to provide investors with a yield of about 7%, which is similar to Reits listed in Singapore.

The Housing Authority is a government body primarily charged with the task of providing subsidized housing to people in need. But building vast housing estates has in turn led to operating car parks and shopping malls. The Murray House building on Stanley's waterfront, for example, is a nice spot for tourists on a Sunday afternoon but is a long way from the authority's social objectives.

More important, the authority has no cash. The government's efforts to shore up the property market included a complete and indefinite halt to the sale of flats owned by the authority, which has led the authority to lose money. In better times it may have been able to turn to the government for support, but given the poor state of Hong Kong's finances that option is currently not available. So, to raise cash the authority has decided to sell off its entire portfolio of retail and car-parking properties, save for a few dud facilities that aren't considered to be investment grade.

Using a Reit, or Reit-like, structure has a number of benefits, says the government. Packaging the properties into a single investment vehicle will be quicker and simpler than selling off each property through the real estate market and, at the same time, will not cause a shock in the property market by flooding it with new properties. A Reit will allow the Housing Authority to realize almost the entire net asset value of its properties and will provide good investment opportunities for investors.

If the Housing Authority does choose a Reit the HK$20 billion deal will be easily the largest listed property trust in Asia and one of the largest real estate deals of its kind anywhere in the world.



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