Hong Kong's property market offers attractive Real Estate Investment Trust (REIT) assets, especially for overseas players

The Hong Kong government raised HK$19.5 billion (US$2.5 billion) with the November initial public offering (IPO) of its Link REIT, the world's biggest share sale of a property trust. Link, which soared as much as 55 per cent on the market since being listed, should provide investors with a steady stream of earnings from its 151 shopping malls and 79,000 car parking spaces in Hong Kong.

The Link was followed in quick succession in December 2005 by Hong Kong property giant Cheung Kong raising HK$867 million (US$114) million from its Prosperity REIT, which has seven office and industrial buildings in Hong Kong. Then Guangzhou Investments raised HK$1.8 billion (US$230 million) selling its GZI REIT, setting another new milestone as the first REIT to be listed globally based on property assets in China. The REIT features prime commercial buildings based in the southern Chinese city of Guangzhou.

Local and foreign institutions and Hong Kong's army of small investors clamoured to buy the new issues with all three receiving orders for many times the number of shares that were offered.

Overwhelming response

"It's a good start. The first REITs received an overwhelming response," said Buggle Lau, chief analyst of leading estate agents Midland Realty. "The Hong Kong property market experienced a seven-year correction after 1997 (the Asian financial crisis) but has picked up again and it's pretty attractive for investors."

Hong Kong's stock market watchdog the Securities and Futures Commission (SFC) laid the groundwork for REITs to add a new dimension to the Hong Kong stock market by writing a set of rules to govern how the investment vehicles are set up. Corporate landlords can decide to spin off some or all of their property assets into a REIT which is then sold to investors in IPO and listed on the stock market. The REITs have their own management teams and independent trustees to make sure they act in the interests of shareholders.

REITs are attractive for investors because of their consistent profits. The SFC's code says REITs should pay out 90 per cent of profits to investors in the form of dividends, says Ming Tse, a director of accountants PricewaterhouseCoopers (PwC) in Hong Kong. That can give investors a handsome dividend yield, calculated by dividing the annual payout per share by the share price. The dividend yield for a REIT can be comparable to a bond. The first three in Hong Kong were sold at yields of about 5-6 per cent. But unlike bonds which have fixed annual coupon payments, REITs have the potential to increase their payouts if rental income from tenants in the property goes up. That could well happen if Hong Kong's property market extends an upturn which began in 2003.

"REITs can be attractive assets, especially for overseas players. They should attract institutional players and pension funds to invest," said Kenny Tang, associate director of Tung Tai Securities.

The advent of REITs in Hong Kong should also be beneficial to the market as a whole.

More listings to follow

"If Hong Kong can attract more long-term funds it can improve the size of the market and make it more stable," said Mr Tang. After the success of the first trio of REITs, there are likely to be as many as 10 more listed this year, he added. Real estate giant Sun Hung Kai Properties is considering a HK$2.3 billion (US$300 million) REIT, while Henderson Land Development is also reportedly studying a plan to raise up to HK$3.9 billion (US$500 million) in the first half of this year through a REIT. Australia's Macquarie Bank, meanwhile, has teamed up with Chinese property company Dalian Wanda to launch a REIT containing shopping malls in a flotation which could reportedly raise HK$778 million (US$100 million).

"I think there is a lot more in the pipeline, especially REITs which have properties in China. I think it is seen as a good way to obtain a listing in Hong Kong," said PwC's Ms Tse.

The shares of property companies in Hong Kong traditionally trade on the market at a discount to their true value. The discount reflects the uncertainty among investors about how big a share of the profits they will receive in the form of dividends. But the rule mandating 90 per cent payouts means investors are prepared to pay near to the full value for the assets in REIT form.

"(REITs are) a good thing for the companies, especially those trading below their net asset value. The spin off is positive to them as the share price can reflect the true value of the assets," said Y.K. Chan, a fund manager with Phillip Asset Management.

Related links
Hong Kong Stock Exchange 
Securities and Futures Commission