Following the success of REITs in other markets such as the US, Australia and Singapore, the Hong Kong regulator has released a draft code for public consultation. The consultation will last one month with a finalised code being released in the second quarter. The first approved REITs should appear some time in the third or fourth quarter according to the SFC. The code will be independent and not be merged with the unit trust code as was done recently with the code for hedge funds.
Alexa Lam, executive director of intermediaries and investment products at the SFC, says the code has been released in response to market demand and after a period of informal consultation with the financial industry. She says that this will provide a third option for Hong Kong investors in property and make property management expertise available to the public.
"The proposed introduction of the REITs Code is one of the initiatives in the SFC's continuous efforts to broaden the choice of investment products available to the investing public and to further reinforce Hong Kong's leading position as an international financial hub," says Lam. "Through REITs, retail investors may invest in large-scale income-generating real estate in a cost effective manner, with a relatively transparent and well-defined investment strategy."
The SFC has proposed that all REITs be structured as trusts, as is the form in Australia, rather than as companies as in the US.
A management company of a REIT must be licensed by the SFC to manage collective investment schemes and have at least five years' track record in managing public funds. It must also have two key personnel, each with at least five years of experience in analysing the Hong Kong property market or advising on property investment in Hong Kong, including two years with respect to the type of properties proposed by the scheme. The company can delegate the property management function to a professionally qualified property manager. Similar requirements for key personnel in the delegate company are proposed.
In response the concern that Hong Kong managers have little experience in REIT management, the SFC will consider overseas REIT managers from acceptable jurisdictions in order to help develop REIT management expertise in Hong Kong.
The trustee of a REIT must be a licensed bank subsidiary of a bank or an overseas bank that is acceptable to the SFC. It must have at least three years experience as a trustee of a REIT or similar scheme and ensure adequate insurance coverage is arranged for the properties of a REIT.
Each REIT must appoint an independent property valuer. The valuer will have to retire after two years and not be able to be reappointed for a further two years.
A REIT in Hong Kong will be permitted to invest only within Hong Kong, although this may be relaxed over time and is something on which the SFC is asking for public comment. There will be a two-year minimum holding period for investments. The scheme will be required to distribute all after-tax income as dividends.
The REITs will be encouraged to list on the stock exchange of Hong Kong. For those not listed a subscription/ redemption mechanism must be provided. It is proposed that subscription/ redemption be allowed at least once a year and that redemption be limited to 10% of the outstanding units. There will be no special tax status for REIT investments.
