SFC mulls giving HK Reits greater flexibility

Hong Kong's Reits may get more freedom to invest in property developments and certain financial instruments.

Recent proposals submitted to Hong Kong’s securities regulator may broaden the investment mandate of local real estate investment trusts (Reits).

The Securities and Futures Commission is holding a consultation through to the end of February on these proposed amendments, which if passed, would give Hong Kong Reits more flexibility when investing, according to an SFC statement.

The proposals include relaxing current restrictions on Reit investments in properties still under development, as well as lifting a ban on investments on property-related financial instruments.

At the moment local Reits are prohibited from investing in vacant land or engaging in developments, including refurbishments, retrofits and renovations. These restrictions were imposed mainly to ensure Reits invested in consistent income-generating real estate.

This may soon change. Last year, the SFC received a number of enquiries from Reit managers seeking to invest in development properties. These firms argued that jumping early into projects offered a number of advantages. The “design and build” model could feed into a Reit’s long-term and organic growth plan, they said, and the acquisition costs could be lower.

In addition, the Commission received requests by managers to loosen restrictions on the types of instruments Reits can invest in, the argument being that investing in shares of listed property companies, units in property funds, or other listed Reits and debt instruments, could offer some diversification in difficult market conditions.

Not everyone agrees.

Some managers note that it takes time to generate returns on early-entry property investments, and also point out that Reit managers may not have the expertise to conduct and oversee property developments, which is somewhat different to managing property for rental income.

The SFC has also received concerns over the proposal to allow Reit managers to invest in certain financial instruments, with opponents arguing that Reits managers may be tempted to pursue short-term or high-risk investments, thus raising the risk profile of the business.

As such, the SFC has suggested in a consultation paper that early-entry property investments should not exceed 10% of a Reit’s total assets under management. A similar 25% restriction could be placed on a Reit's financial instrument holdings.

“There are people for the amendments and some [who are] are more conservative,” Stephen Chan, associate at Latham & Watkins in Hong Kong, told FinanceAsia. “The SFC took into account the views of people for and against and I think it’s sensible to impose the thresholds.”

Reits are, by definition, income-generating products and, as such, should mainly be invested in direct property or real estate, said Chan. But allowing Reits to invest in early-stage development products or financial instruments could benefit the investors in the long run, he added.

Despite having a huge property sector, Hong Kong’s Reit market is relatively small – Chan estimates there are around 10 listed Reits on the Hong Kong Stock Exchange. Reasons for this vary but participants often cite difficult registration processes as a major deterrent for listing in the city.

However, implementing these proposals may help make Hong Kong a more appealing place to list, although it will take time, he added.

There is no timeline for when these proposals may come into place.

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