Alexa Lam of SFC explains the latest pro-active move to reinforce Hong Kong as an international financial hub

Permission for these products to be offered later this year was given recently by the Securities and Futures Commission (SFC). The move has been widely welcomed by property companies and institutions, and resulted from a comprehensive consultation by the commission earlier this year.

The speed at which REITs were approved reflects Hong Kong's flexible approach to deepening its financial markets. It follows last year's ground-breaking authorisation of retail hedge funds.

"Over the years, the SFC has facilitated the development of a wide range of investment products, offering more investment choices to the general public and gradually increasing the breadth and depth of the Hong Kong financial market," said Alexa Lam, executive director for intermediaries and investment products at the SFC.

Continuous effort to widen choice

"Following the launch of retail hedge funds, the introduction of REITs is part of our continuous effort to widen the range of investment products available to the retail public and to reinforce Hong Kong's position as an international financial hub," Ms Lam added.

REITs, which originated in the US, are now well established in other markets and are becoming increasingly popular in Asia. The trusts invest in established property such as apartment blocks, shopping malls, hotels and even theme parks. The rental income stream is then distributed to investors in the REITs.

With an estimated return of up to 7 per cent, Hong Kong REITs are expected to attract the attention of international institutions such as insurance companies and pension funds seeking safe sources of income.

Hong Kong analysts welcomed the move and said REITS would provide investors with regular income from the local property market, as well as enabling real estate companies to unlock cash tied up in existing developments.

The SFC's consultation resulted in a number of amendments to the original guidelines set out for REITs. Key changes included the adoption of a more favourable tax treatment for REITs, and a reduction in the minimum amount of income to be distributed to shareholders from 100 per cent to 90 per cent.

Retail investors the first to benefit

Although the funds' assets will be initially restricted to Hong Kong properties, the SFC's Ms Lam said this was to give retail investors time to understand the new product, and the scope could be widened in the future.

"The SFC takes the view that this geographical restriction need not be in place indefinitely," she said. A task force will be set up to review benchmarks for investment in overseas markets, she added. This opens up the exciting prospect of REITs being established to tap into the long-term potential of China's exploding property sector.

The introduction of REITs is also expected to broaden Hong Kong's investment skills.

"The management of REITs involves both investment management and property management expertise. Both types of expertise are already present in Hong Kong, and the introduction of REITs will facilitate co-operation and partnership between fund managers and property managers. Such co-operation would eventually enable the development of REIT management skills in Hong Kong and thus broaden the management skills of the investment managers in Hong Kong." Ms Lam said.
 
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SFC www.hksfc.org.hk