Financial institutions are calling for Hong Kong's securities and futures commission (SFC) to modify its proposal for introducing real estate investment trusts (REITS) to include international investments and tax breaks.
The SFC has published submissions that have made in response to its consultation paper on the draft code for REITs in Hong Kong. The consultation paper, published in March, is open for public consultation until today, 23 April, and while the SFC is still looking at submissions it has published over 20 on its website.
Brokers, property companies and other interested parties are all calling for amendments to be made to the code. Allowing investment in international property, particularly the PRC, is widely supported. The tax status of REITs also comes in for scrutiny with calls for tax breaks and for more flexibility in how REITS can be structured. A limit of the amount of leverage allowed, or how much the REIT can borrow, is also commented on, with calls for either the limit to be raised, or abolished altogether.
The overall tenor of the submissions is a desire for a code that is less restrictive and more in keeping with the open market traditions of Hong Kong. The most widely called for change is allowing investments outside Hong Kong. As the Deacons paper says, "The narrow geographic scope of the permitted investments and the limitations on the legal structure of REITs is inconsistent with Hong Kong's position as an international financial centre and gateway to China."
Some comments favour no restrictions at all, such as those put forward by Merrill Lynch, and say that that the market should be allowed to decide. Others agree on some restrictions, but would like China in particular added to possible areas of investment.
Centaline Surveyors recommends allowing international investment, particularly to China. "On the one hand, this helps to diversify the investment risk by exposing to different property cycles of the various markets. On the other hand, it may increase the attractiveness of REITs by including properties with greater growth potential," says Centaline. Those few that agree with the restriction also say they favour a gradual relaxation to allow international investment, something suggested as possible in the draft code.
The second major area of concern is the tax treatment of REITs in Hong Kong. There were fewer comments on this in the published submissions, but again those that did comment wanted some sort of favourable tax treatment, ranging from allowing REITs to set up holding companies to invest in the property, thereby allowing the REITs to avoid property tax, to straight tax breaks for REITs.
The current proposals, it is felt, will mean REITs will face a relatively high tax burden, making them unattractive to both investors and property owners.
Bright Star International, an investment and property management company, writes, "It is suggested that 50% or more of the tax payable could be exempt for the investment life of the scheme so as to increase dividend payout to investing public, which will then appeal and encourage investors to participate in the market."
Or as one of those that preferred anonymity wrote, "No tax is better then some tax."
Other comments are more carefully considered ranging from the single line already mentioned, up to the Deacons paper, which includes a long list of contributors and argues for flexibility in the structure of REITs to allow favourable tax structures to be set up.
The third area raised by many of the submissions is restrictions on leverage. The submissions believe it is too restrictive and either advocate no restriction or a higher limit than 35% of net asset value. The Merrill Lynch paper sums up the feeling of many about this issue and other concerns when it says, "No restriction should be required as the optimal gearing level would be driven by market demand and investors' risk appetite."
After considering the submissions the SFC has previously said that no further consultation paper will be released, although this is called for by Franklin Templeton Investments among others.
The SFC will meet with those who have made submissions for clarification or further comment but the next paper to come out will be the final code.