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The Implications Of New Impetus To Reinvigorate The Hong Kong REIT Market

While Hong Kong has taken steps to revitalise its REIT market, there’s still more to do to catch up with other regional regimes.

By Patrick Ma, Director, Listed Products and Research, Admiral Investment Limited

October 25, 2021 – The Hong Kong REIT market has seen significant events in the past twelve months that have changed the dynamics of the sector.

In December 2020, the Hong Kong Securities and Futures Commission (SFC) amended the Code on Real Estate Investment Trusts (HK REIT Code). Among the changes were allowing Hong Kong REITs to invest in minority-owned properties, subject to these investments falling under the “core” properties category. Hong Kong REITs can also invest in property development projects beyond the 10% Gross Asset Value (GAV) limit, and finally, the SFC raised the cap on REITs’ aggregate gearing ratio from 45% to 50%.

In May 2021, the SFC separately announced a fee subsidy scheme to entice REITs to list in Hong Kong. Potential REITs with a minimum market capitalisation of HK$1.5 billion (US$193 million) can claim up to 70% of their professional fees, subject to a cap of HK$8 million per REIT. Also, in May 2021, the Financial Services Development Council (FSDC) proposed including Hong Kong REITs under the Stock Connect schemes. The scheme, which links the Hong Kong stock exchange with the mainland stock markets of Shanghai and Shenzhen, will allow mainland Chinese investors to trade Hong Kong REITs.

China Launches REIT Market

While Hong Kong stepped up to revitalise its REIT regime, China, in June 2021, floated the first batch of its REITs, consisting of nine REITs covering infrastructure projects, business parks and logistics assets. China’s REIT rules are more stringent than those in Hong Kong in terms of tighter leverage requirements and criteria for sectors and the location of the underlying assets. 

Undoubtedly, the objective of Hong Kong’s move to enhance its REIT Code and the introduction of various other favourable government policies is to expand the investment scope of Hong Kong REITs, support local REITs’ operations, and encourage new investment flows into the industry, especially from the mainland.

The relaxation of REIT rules for minority investments has already helped smaller Hong Kong REITs expand their portfolio to include overseas assets. One example is Champion REIT. It entered the London office market after investing a 27% stake in London’s 66 Shoe Lane, which was valued at HK$2.75 billion, in April 2021. 

We believe the proposal to include Hong Kong REITs under the Stock Connect schemes will also spur fund flows from mainland Chinese investors. We have already started seeing IPOs with China-based assets, such as SF REIT’s IPO in 2021, and we expect more to come in the future.

It is clear from the Hong Kong government’s recent policy changes that it wants the Hong Kong REIT market to increase its depth in terms of asset types and geography while tapping fund flows from mainland Chinese investors. While the Hong Kong REIT market had a relatively early start compared to other Asia Pacific REIT markets, it lagged in terms of its expansion of its free-float market capitalisation. Hong Kong and China REITs have a combined free-float market value of US$26 billion, compared to Japan’s US$142 billion, Australia’s US$ 96 billion and Singapore’s US$53 billion. Hong Kong and China REITs have a combined 7.6% share of the global REIT free-float market cap, and that share has been falling since 2019.

Source: GPR, as at September 21

Source: GPR, as at September 2021

We believe that the Hong Kong government is keen to promote its REIT market as part of its strategy to maintain the territory as an international financial centre as well as a credible alternative for southbound mainland Chinese investments. Moreover, a solid and robust Hong Kong REIT market will complement China’s plan in developing its own REIT market, especially if mainland China REITs want to tap Hong Kong’s capital markets in the future.

However, for the Hong Kong market to reach its full potential, further developments and policy initiatives are needed. We list them below.

  • Tax incentives 

For most REIT markets, dividends from REITs are often tax-exempt for unitholders to avoid double taxation. However, Hong Kong has not provided any tax incentives on dividends from REITs, thus being less attractive to investors when compared to other markets. Therefore, any progress on lessening the tax burden on REIT unitholders will be helpful.

  • Lack of other asset types

The Hong Kong REIT market development has lagged behind other major markets due to a relative lack of depth beyond Link REIT and an absence of diversity in asset classes. Most REITs focus on traditional office or retail properties in Hong Kong. A possible solution to deal with this issue includes further relaxing the regulations on the scope of investments for REITs. This will allow the REITs to grow and diversify their asset base. The government should also consider offering more incentives to attract new REIT listings in Hong Kong. The current subsidies to cover REITs’ professional fees is a good start.

In summary, we believe that the Hong Kong government is moving in the right direction in its attempt to help the Hong Kong REIT market become more diversified and expansionary. We expect local REITs to take advantage of the relaxed rules and scale under the revised REIT Code to grow their asset base. With the right policy tools, the Hong Kong REIT market will be in a position to become a strong market, especially with potential fund flows from mainland Chinese investors and new listings from China-based REITs.

About the author:

Patrick Ma, CFA, has served as Admiral’s Research Director since 2016 and subsequently Admiral’s Director, Listed Products and Research.  Patrick is responsible for the investment research that backs all of Admiral’s investment advice and management activities.   He is also responsible for Admiral’s products in the listed space. Patrick has over 20 years of experience in the s