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Hong Kong Publishes REIT Consultation Conclusions

by Mary Swire, Lowtax.net, Hong Kong
25 July, 2014

Hong Kong's Securities and Futures Commission (SFC) has released the conclusions to a consultation, launched earlier this year, on proposals to amend the Code on Real Estate Investment Trusts (REIT Code) to introduce flexibility in their investment scope.

In January this year, the SFC published proposals to give REITs the flexibility to invest in property development activities and financial instruments. The proposals have been generally supported by stakeholders, who have agreed that they would facilitate the long-term growth of the Hong Kong's REIT market and are broadly in line with regulations in comparable international markets.

Alexa Lam, the SFC's Deputy Chief Executive Officer, said that "the amendments that we are making to the REIT Code will help to promote the growth of Hong Kong's REIT market in a manner that protects investors' interests and market confidence."

Since the first REIT was listed in 2005, the Hong Kong REIT market has seen steady and stable growth in both breadth and depth. Hong Kong's REIT portfolios have been widened previously to offer investors a diverse choice from retail properties to commercial and hotel properties and properties in Mainland China. The market further saw a major milestone by listing the world's first RMB denominated REIT in 2011.

The proposals seek to introduce further flexibility for REITs by permitting them to invest in properties under development or engage in property development activities, and also to purchase financial instruments (including listed securities, unlisted debt securities, government and other public securities, and local or overseas property funds), subject to at least 75 percent of the gross asset value (GAV) of a REIT being invested in real estate that generates recurrent rental income at all times.

Relevant restrictions would also be introduced to ensure transparency in a REIT's activities. These restrictions include maximum thresholds on investments (such as a limit on property development investments of up to ten percent of a REIT's GAV), a minimum holding period of two years after completion of the property developed, a restriction on investment in vacant land, and disclosure and reporting requirements.

It was said that, in considering the proposed amendments to the REIT Code, the SFC has been mindful of the need to strike a proper balance between facilitating market development and competitiveness on the one hand, and ensuring the protection of investors' interests on the other.

In fact, in reviewing the responses to its proposals, the SFC gave consideration first and foremost to the nature of REITs as vehicles which seek to provide recurrent rental income, while also being mindful that REITs should still remain distinguishable from property development companies. Above all, the SFC has confirmed that the proposals, and their associated limits, have been measured against a primary principle of investor protection.

The revised REIT Code will become effective after it is gazetted. The SFC will also provide further practical guidance to the industry by way of a set of Frequently Asked Questions.

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