Real estate executives discuss SFC Reit proposals

The experiences of larger Reit markets such as Singapore and Australia suggest Hong Kong's industry might benefit from having greater flexibility but the devil is in the detail.

A group of real estate industry participants has weighed-in on proposals submitted to the Securities and Futures Commission to revamp the rules governing real estate investment trusts (Reits).

The proposals could broaden the investment mandate for local Reits, and include relaxing restrictions on Reit investments into properties still under development, as well as lifting a ban on investments on property-related financial instruments.

But opponents have a number of concerns. It takes time to generate returns on early-stage property investments and some cite worries that Reits managers may be tempted to chase short-term or high-risk investments, raising the risk profile of a product that’s supposed to generate steady income.

(At the moment, Hong Kong Reits are prohibited from investing in vacant land or engaging in property developments, including refurbishment, retrofits and renovations, rules that were imposed mainly to ensure Reits invested in consistent income-generating real estate.)

In an effort to address the proposals and the potential risks, the Asia Pacific Real Estate Association (APREA) last week held an event for Reits managers, investors, service advisors and other financial institutions in Hong Kong.

“These are two very important proposals and we wanted to create a forum where there could be full and open discussion for people to air concerns, and also to just generally get an assessment on what the market is thinking,” said Peter Mitchell, APREA's CEO.

Participants were divided, with supporters and opponents both outlining the benefits and drawbacks.

Mitchell noted some sections of the community misunderstood the development property investment proposal in particular. Some believe Reits may shift away from generating income and effectively turn them into developers. But, if the proposal is passed, early-entry property investments would not exceed 10% of a Reit’s total GAV.

“There was some misunderstanding, particularly with the development proposal,” Mitchell told FinanceAsia. “It’s not generally appreciated that what’s being proposed is quite modest. It’s only 10% of [the Reit’s GAV] that could undertake some development property activity."

“Reits will continue to invest in real estate but they would have the flexibility to engage in a minor amount of development. And [this flexibility] has, in markets elsewhere, really aided capital management [and AUM growth]," Mitchell added.

Reits in Singapore, Australia

He points to the examples of Singapore and Australia. Singaporean Reits have a 10% cap on early-stage property investment. And as of December, the 35-listed Reits in the Lion City had a market capitalisation of $45.5 billion.

Australian Reits, meanwhile, have no limit on early-stage property investments. As of December-end, the country’s 56-listed Reits had a market cap of $85.2 billion.

Comparatively, Hong Kong’s market is miniscule – 12 Reits made up $23.8 billion of market cap through the end of last year.

But loosening the restrictions on these products’ investment capabilities could in theory boost the city’s Reit’s industry.

Supporters of the early-stage investment proposal argue that jumping into early projects – or the “design and build” model – could feed into Reit’s long-term and organic growth plan. And depending on the stage of the real estate cycle, acquisition costs could be lower.

Diversifying into different financial instruments, such as shares of listed property companies, units in property funds or other listed Reits and debt instruments, may also offer diversification in difficult market conditions.

“They must continue to be primarily a vehicle for investing passively in quality income earning real estate. That’s why investors are attracted to Reits. But there does need to be some flexibility, depending upon cycles. It’s not always in the interest of investors to hold 100% in income-earning real estate,” Mitchell said. “Depending on the cycle, it makes sense to allocate a minor proportion into other assets.”

Overall, he said that participants supported both measures “in principal”, although notes there are still quite a few details that need to be worked out.

The SFC is holding a consultation through February 26. There is no timeline for when these proposals may come into place.

¬ Haymarket Media Limited. All rights reserved.
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