On Dec 12, the Hong Kong REIT (H-REIT) market, Hong Kong REITs Association (HKREITA) and Deloitte China released a report on views to revitalise the H-REIT sector with feedback from market participants.
For instance, H-REITs are formed under a unit trust structure which faces capital-raising challenges. Although H-REITs can use debt or equity for funding, equity issuance approval and leverage limits especially restrict smaller REITs’ growth. H-REITs are also required by the REIT Code to retain properties for at least two years, impacting divestment timing based on investment strategy.
In the Deloitte report titled Unlocking Future Growth through Reform: A Vision for Hong Kong REIT Market, suggestions by market participants include introducing corporate structures for H-REITs, while maintaining asset protection through independent custodians. This flexibility would also enable participation from institutional investors that face restrictions on trust investments or fund-of-funds structures, ultimately strengthening Hong Kong’s competitive position against other marketplaces as a preferred REIT domicile.
George Hongchoy, CEO of Link REIT and honorary founding president & chairman of HKREITA, says: “To address current structural limitations and attract more market entrants, we advocate for the introduction of corporate structures for H-REITs that maintain asset protection through independent custodians. This flexibility would enable participation from institutional investors who may face restrictions on trust investments. Meanwhile, relaxing the two-year property holding rule would allow H-REITs to respond quickly to market changes and optimise portfolio management without sacrificing long-term stability.”
Relaxing the development limit from 10% to 25% would not compromise the fundamental characteristics of H-REITs, as other key principles in the REIT Code, such as the 75% investment in income-generating real estate and 90% dividend distribution requirements, would remain intact, the Deloitte-HKREITA report indicates. The Singapore Code on Collective Investment Schemes, for instance, allows S-REITs a development limit of 25% of their total assets, subject to certain conditions.
H-REITs have an aggregate leverage ceiling (loan-to-value) of 50%. Regulators could be more flexible on aggregate leverage if it is complemented by interest coverage ratios, investment grading or tiered leverage limits, the report suggests.
See also: Keppel DC REIT divesting Basis Bay Data Centre in Malaysia at 2.6% above valuation
Tax revisions
The most benefits could accrue to H-REITs with tax revisions, suggests Sherman Hung, head of large corporate, institutional banking group, at DBS Bank (Hong Kong). Tax transparency represents a key consideration for REIT conversions. A framework that shifts taxation from the trust to investor level could potentially generate higher yields through more advantageous tax treatment, and offer the possibility of higher valuations for sponsors. This would in turn create an attractive economic incentive for new REIT launches and encourage more property acquisitions by existing H-REITs.
Hong Kong could set a competitive withholding tax rate for foreign entities investing in REITs, similar to Singapore’s 10% rate. This would enhance Hong Kong’s appeal to international capital, Hung suggests.
See also: Digital Core REIT faces tenant exit for Northern Virginia property
The government could consider either exempting H-REITs from stamp duty on property transfers or reducing the rate to 0.2% for direct property transfers into H-REITs, aligning with the rate levied on transactions through special purpose vehicles. This could effectively reduce sponsors’ asset restructuring costs. “Singapore’s experience offers an instructive example: its stamp duty remission policy for local property transfers to REITs from 2005 to 2015 helped the industry build a substantial domestic asset base, which subsequently served as a foundation for international expansion,” Hung says.
Alternatively, Hubert Chak, CEO of SF REIT’s manager, suggests that stamp duty collection could be deferred until after successful listing.
Stock Connect, HKD-RMB dual counter model
Despite regulatory and tax considerations, industry experts are upbeat about prospects for the Hong Kong’s REIT market. For instance, the introduction of new policies, such as the inclusion of REITs in the Stock Connect programme, is expected to significantly boost liquidity and trading activity, similar to the surge seen in ETFs after their addition to the scheme.
Lin Deliang, CEO of Yuexiu REIT’s manager, suggests REITs should be included in the HKD-RMB dual counter model. The authorities should explore a streamlined dual-listing framework between Hong Kong, Shanghai and Shenzhen for H-REITs and mainland REITs to expedite the listing timeline.
“Expanding dual-counter trading to H-REITs would enhance RMB market development by offering investors trading flexibility in both currencies. This would improve market liquidity and reduce counter-price gaps. With Stock Connect inclusion, RMB-denominated H-REIT units would attract mainland investors via Southbound trading. We should also streamline the REIT listing process and explore a dual-listing framework with mainland exchanges,” Lin says.
Other proposals to boost H-REITs include diversifying the asset mix to include data centres, healthcare and other assets; and strengthening investor education. To encourage IPOs, the report suggests streamlining the REIT listing process such as reducing documentation requirements.
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Some proposals such as combining a one-tier aggregate leverage with ICR have been implemented by the Monetary Authority of Singapore.
Singapore has attracted 40 REIT listings compared to Hong Kong’s 11. Even then, Singapore has had a REIT IPO drought. Its most recent REIT IPO, Digital Core REIT, was in December 2021. In the Asia-Pacific timezone, DigiCo Infrastructure REIT, a stapled security, has been the largest IPO on the Australian Securities Exchange (ASX) since 2018. However, as of Dec 16, it is trading lower than its offer price, which market observers say is a reflection of the interest rate cycle.
