"With renewed vigour, Hong Kong’s property market is catching the eye of canny investors who are looking for untapped potential – Hong Kong REITS (H-REITS) is the dangling carrot needed to entice long-term prospects."

As Asia’s leading financial services centre, Hong Kong is in a strong position to capture the rising opportunities that global markets throw up. A regional commercial hub that is inextricably linked to the world’s second largest economy, the city, unquestionably, is in an enviable position. However, untapped potential exists, particularly by way of the city’s Real Estate Investment Trust (REITs) sector.

Growth potential in H-REITs

We at the Financial Services Development Council (FSDC) believe that REITs are an organic component of the financial services industry. With the city’s unique opportunity to build an edge by providing more varieties in the underlying assets of H-REITs, the appeal to a broader range of investors with different risk appetites and investment preferences makes the proposition an attractive one.

REITs in many markets have long been a popular method of income-producing investment with REITs in Hong Kong required to pay out at least 90% of their after tax net income to shareholders in the form of dividends with yields ranging from 3.92% to 8.93% as of 20 August 2021, it is easy to see the attraction.

Historically, the choice of asset types has been limited with commercial real estate such as shopping malls, industrial buildings and hotels dominating. That has changed as the global economy evolves, with new opportunities in warehouses, logistic centres, data centres, hospitals and student accommodation all offering the ability to generate returns. This is great progress, and we may soon see this class extend to other areas such as public healthcare buildings and leisure facilities.

Favourable Factors and Opportunities with H-REITs

With Hong Kong’s simple and low tax system, REITs are exempted from profits tax. For investors, local and foreign, individual and institutional, no tax is imposed on capital gains or dividend income, keeping in line with the city’s position as a wealth-generating hub. More recently, the Securities and Futures Commission (SFC) has begun administering a grant scheme to provide up to HK$8 million subsidies for each qualified investment trust to be listed in Hong Kong. Such an initiative, together with the Government’s and regulators’ dedication to promoting the REITs market, is bringing positive sentiment to the overall market.

A unique and attractive element of the H-REITs concept is ‘the great connector’ factor between Hong Kong and the Mainland. Apart from having the option to list in both HKD and RMB, it is hoped that H-REITs will be made accessible to Mainland investors via the Stock Connect programme soon. This would see a two-way investment proposition in each market. For overseas investors looking to up their stake in Mainland assets, especially in infrastructure, preferential access is on the cards; Mainland investors could seize the opportunity by channelling regional and global real estate investment through Hong Kong.

Creating a regional hub to rival other markets and instantly become an attractive international destination point co-insides with the development of the Greater Bay Area (GBA). REITs can be utilised to further improve the efficiency of resource allocation in fixed assets, to promote the implementation of the current economic growth strategy and, helping with the economic expansion and transformation, invigorating the real estate assets of issuers, and enriching the investment choices of investors.

The Hong Kong and Mainland economy offers an unprecedented opportunity for the former to further its REITs market by riding on the coat tails of Mainland authorities’ announcement to pilot and foster REITs (C-REIT) with an initial focus on the infrastructure sector. In June, a total of US$5 billion was raised from the successful listing of the first batch of 9 infrastructure on the Shanghai and Shenzhen Stock Exchanges.  With a deep RMB liquidity pool that sits at around RMB 750 billion, demand for products related to the currency will gain momentum in the offshore market and thus increase the attractiveness of Hong Kong’s REITs offering denominated in RMB.

It is worth mentioning the carbon neutrality factor too, this also provides an opportunity given the sheer level of investment that is expected to go into new energy infrastructure and technologies. It is estimated that the Mainland will need to invest US$15 trillion over the next three decades with at least 70% of that emanating from the private market to be carbon neutral by 2060 – C-REITs and H-REITs are indeed timely as a tool putting capital to good use.

Key Recommendations

The FSDC have recently released a research report titled “Revitalisation of Hong Kong’s Real Estate Investment Trusts Market – Promoting Liquidity”, with the aim of furthering the development of H-REITs with policy recommendations.

Indeed, those recommendations encompass several key areas. In the face of a competitive landscape, it is imperative Hong Kong emphasises its uniqueness but in the context of a more refined value proposition. The city should express how it welcomes different types of income generating assets to list as REITs leveraging its simple and low tax system, which does not impose tax on offshore profits, capital gains, dividends or value added tax – an attractive means that automatically applies to REITs.

The ability to capitalise on Hong Kong’s unique competitiveness and to keep pace with the rapidly evolving global landscape is key to bringing prosperity to our REITs market. Our own view is that it won’t be long before Hong Kong stakes its claim as a go-to market for investors looking for big potential in what is proving to be an increasingly competitive landscape. The potential is there as is the willpower of the Hong Kong SAR Government – and now we invite all interested parties to join us.

(This article was first published at https://www.capital-hk.com/ on 17 Sep 2021.)