Revitalisation of Hong Kong's Real Estate Investment Trusts Market - Promoting Liquidity - FSDC Paper No.48

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Revitalisation of Hong Kong's Real Estate Investment Trusts Market - Promoting Liquidity - FSDC Paper No.48
FSDC Paper No.48

Revitalisation of Hong Kong’s
Real Estate Investment Trusts Market
- Promoting Liquidity

May 2021

I.   Executive Summary                                                                      1

II. Background                                                                              2

III. Global Development Trends                                                              4
     1. REITs Gaining Increasing Popularity                                                 4
     2. Proliferation of New REITs Asset Types                                              5
     3. Historial performance of REITs and the Implication of a Low-Interest Environment    7

IV. Challenges and Opportunities for Hong Kong                                              8
    1. Untapped Potential of H-REITs                                                        8
    2. Capturing Growth Opportunities                                                      10

V. Policy Recommendations                                                                  12
   1. Refining the REITs Value Proposition                                                  12
   2. Tapping into Cross-Boundary Investor Base                                            14
   3. Diversifying REITs Product Offerings                                                 15
   4. Exploring Tax and Financial Incentives                                               17
   5. Implementing Regulatory Enhancements Expeditiously                                   18
   6. Stepping up Market Promotion and Regulatory Communication                            19

VI. Conclusion                                                                             21

Appendix. Cross-Market Comparison of REITs Regimes                                         22
I. Executive Summary
Real estate investment trusts (REITs) have gained wide popularity across the globe over recent
years, having undergone significant growth in total market capitalisation and been introduced in
more than 40 jurisdictions worldwide. As Asia’s international financial centre, Hong Kong saw the
inception of its REITs market in 2003 with the enactment of the Code on Real Estate Investment
Trusts (the REIT Code). As at the end of April 2020, there were 10 REITs listed and trading on the
market with an aggregate market capitalisation of around HK$244 billion.

Although Hong Kong is one of the earlier markets to have rolled out its REITs regime followed by
various subsequent market development endeavours, it appears that REITs as an asset class is yet
to garner sufficient traction, especially when compared to the other fast growing financial products
available on the market. Nevertheless, it is our belief that Hong Kong is in a unique position to capture
the rising opportunities to revitalise its REITs market, by capitalising on the city’s long-established
and widely recognised legal system, simple and low taxation, vibrant and diversified pool of market
participants, as well as ample supply of financial and professional services practitioners.

In fact, as announced in the 2021-22 Budget, the Government has committed to providing subsidies
for qualifying Securities and Futures Commission (SFC) -authorised REITs to cover 70% of listing expenses
paid to local professional service providers with a cap of HK$8 million each REIT.1 Such initiative,
together with the emphasis placed on promoting REITs in Hong Kong in the 2020 Policy Address, are
bringing positive sentiment to the market.

To this end, the Financial Services Development Council (FSDC) has formed a dedicated Working
Group comprising industry experts to revisit a previous paper titled “Developing Hong Kong as a
Capital Formation Centre for Real Estate Investment Trusts”2 (2013 FSDC Research Paper) released
by the FSDC in November 2013, in an effort to identify measures that can help bring about further
growth momentum to Hong Kong’s REITs market. This paper sets out policy recommendations
around the following areas:

    • Refining the REITs value proposition;

    • Tapping into cross-boundary investor base;

    • Diversifying REITs product offerings;

    • Exploring tax and financial incentives;

    • Implementing regulatory enhancements expeditiously; and

    • Stepping up market promotion and regulatory communication.

    The 2021-22 Budget,
    FSDC Research Paper No. 04, November 2013,

II. Background
Hong Kong’s success story as an international financial centre is built on the city’s long-established
and widely recognised legal system, simple and low tax regime, vibrant and diversified market
participants, as well as ample supply of financial and professional services practitioners. These
qualities constitute the bedrock of Hong Kong’s world-class banking, equities, fixed income and
derivatives markets and beyond.

Among the various asset classes, REIT has gained wide popularity around the globe but is yet to
gather remarkable momentum in Hong Kong. Over the years, the Government and financial regula-
tors have taken consistent efforts to improve the market and regulatory environment for REITs in
Hong Kong (H-REITs). A few recent measures include the announced subsidies for REITs issuances,
the SFC’s amendments to the REIT Code, and the Mandatory Provident Fund Schemes Authority
(MPFA)’s relaxation of investment limit in H-REITs, among others. However, due in part to the multitude
of financial products and services available on the Hong Kong market, REITs have not been at the
centre of market players’ attention and, therefore, their development is not fully in sync with that of
other rapidly expanding markets.

Globally, the REITs market has seen tremendous growth and evolvement over recent years, driven
by a combination of technological, economic and policy advancements achieved. Against this backdrop,
the FSDC considers it an opportune time to revisit and potentially renew Hong Kong’s approach to
developing REITs, in order to capture the ample opportunities arising from the emergence of many
new asset types, the development of the Guangdong-Hong Kong-Macao Greater Bay Area (the
GBA), and global investors’ increasing preference for stable income streams and asset diversification.

Structure and Characteristics of REITs

While the exact form and structure of REITs may differ by jurisdiction, generally speaking, REITs are
trusts or companies that own and actively manage portfolios of income-producing real estates. As
demonstrated in the 2013 FSDC Research Paper, a typical REIT in Hong Kong consists of a trustee,
a manager (either external or internal) and a sponsor. The same structure, as illustrated below, is
also adopted in Singapore.

Figure 1. A typical REIT structure in Hong Kong and Singapore

                                               Holds units/
                 Wholly/ partly              shares in REIT      Distributions
                                     Portfolio management                Holds properties on
                                             services                    trust for unitholders

                                         Management           REIT        Trustee’s fee
                           Manager           fee                                                 Trustee
                                  Property management                income
                                                                                                    Equity interest
                                      Management                                                    Services
       Property Manager                   fee           Properties                                  Flow of funds
Source: FSDC

The defining feature of REITs in Hong Kong is the mandatory dividend distribution to unitholders as
required by the REIT Code, leading to its hybrid characteristics and unique appeal to investors - that is,
enabling investors to acquire ownership of the underlying assets while receiving steady income
streams generated by those assets. From the sponsor’s perspective, listing its assets as REITs is an
effective way to monetise the income-generating assets while retaining substantive control over portfolio
and property management of such assets, and facilitating a transformation of business model from
asset heavy to asset light.

Table 1. Key benefits of REITs for sponsors and investors

           Key benefits for sponsors                             Key benefits for investors

 • Allowing sponsors with income generating real        In most cases, REITs are listed on stock markets
   estate assets to monetise prior investments          and their shares or units are publicly traded
   while retaining substantive control over             like other stocks, providing investors with:
   portfolio and property management of
   such assets, transforming the business               • Easy access to local / overseas real estate
   model from heavy-asset to light-asset;                 assets managed by licensed asset managers;

 • Reinvesting funds raised through REITs               • Recurring rental income;
   listings into other projects, which may in
   turn become pipeline projects acquired by            • The opportunity to participate in large
   the REITs; and                                         scale real estate investments by smaller
                                                          investment lots;
 • Enabling sponsors to expedite the project
   cycle and put more focus on their core               • Higher level of liquidity than real estate
   competencies to drive long-term growth of              assets; and
   their businesses.
                                                        • Transparency and accountability ensured
                                                          by rigorous listing rules at least at similar
                                                          level to those for listed companies.

Source: FSDC

III. Global Development Trends
1. REITs Gaining Increasing Popularity

Since first introduced to the US in the 1960s, REITs have grown significantly in scale and influence
as an asset class across global markets. By the end of 2020, REITs had been introduced in more than 40

Table 2. Introduction of REITs in global markets

      Year            Number                                         Jurisdictions

   1960-1969               3           Netherlands, New Zealand, United States

   1970-1989               1           Australia

   1990-1999               6           Belgium, Brazil, Canada, Greece, Singapore, Turkey

   2000-2009              17           Bulgaria, Costa Rica, Finland, France, Germany, Hong Kong,
                                       Israel, Italy, Japan, Malaysia, Pakistan, South Korea, Spain,
                                       Taiwan, Thailand, United Arab Emirates, United Kingdom

   2010-2019              12           Bahrain, Hungary, India, Ireland, Kenya, Mexico, Oman, Philippines,
                                       Portugal, Saudi Arabia, South Africa, Vietnam

      2020                 2           Mainland China, Sri Lanka

Note: Year of adoption of REITs rules
Source: National Association of Real Estate Investment Trusts (NAREIT)

As at March 2021, the total market capitalisation of global REITs reached US$2,190.2 billion, having
increased nearly 70% from US$1,294.6 billion as at September 2013 when FSDC’s previous REIT
research paper was released. The global competitive landscape remains generally unchanged, with
the world’s seven largest REITs markets still dominating and making up approximately 90% of total
market capitalisation. The US remains the most sizeable market, accounting for 66% of the world
total, increased by 8 percentage points from 2013.

Figure 2. Market capitalisation of the seven largest REITs markets (September 2013 and March

                          September 2013                                        March 2021

                     Others         Hong Kong                              Others        Hong Kong
                      12%              2%                                   11%             1%
     Singapore                                                   3%
       UK                                                      4%
   Canada                                                    3%
    Japan                                                   7%
         10%                                      US                                                  US
                                                 58%                                                 66%

Source: Bloomberg, FSDC

2. Proliferation of New REITs Asset Types

If COVID-19 had a silver lining, it would be its catalysing effect for expediting penetration of technological
adoption in our daily life. People around the world are turning to virtual channels for communication,
work and business, for the extra flexibility provided during times of restricted physical contact.
Undoubtedly, these changes have posed challenges for the traditional real estate assets, such as
office buildings and shopping malls; on the other hand, however, they have added fuel to the proliferation
of new types of REITs assets that had been emerging over the past years. These assets include
logistic parks, data centres - sometimes referred to as “new infrastructure” - as well as assets essential
to our daily life and well-being such as healthcare facilities and student housing.

In the US, these newer types of assets have proven their attractiveness to global investors with
higher rates of return throughout past years. Based on data by National Association of Real Estate
Investment Trusts (NAREIT), REITs in emerging real estate sectors, including industrial, infrastructure,
and data centre, recorded notably higher returns than the total average during the period of 2015 -

Figure 3. US equity REITs - total annual return by industry (2015-2020)









                                 2015                2016           2017            2018         2019         2020

                                        Industrial          Infrastructure        Data centre      Total average

Source: NAREIT

In Asia, industrial REITs, particularly during the COVID-19 pandemic, have demonstrated higher
resilience and profitability when compared to hotel, office and retail REITs.

Figure 4. Asia Pacific REITs – Indexed total returns (2012-2020)


    (January 2012=100)





                          2012   2013         2014        2015       2016        2017     2018     2019     2020
                                                      Hotel       Industrial        Office      Retail

Source: Asia Pacific Real Estate Association (APREA)

3. Historical performance of REITs and the Implication of a Low-Interest Environment

Although REITs are generally considered more similar in nature to fixed income instruments with their
recurrent rental incomes and mandatory dividend payouts, their historical long-term return is proven
to be decent and comparable to those of certain groups of both equities and bonds, as shown by
a comparison of indexed total returns of REITs, mid-to-large cap equities and government bonds
from 2002 to 2020.

Figure 5. Indexed total returns of REITs compared with equities and government bonds (2002 – 2020)




     (January 2002=100)






                            2002      2004     2006     2008     2010       2012    2014      2016     2018   2020
                                GPR/APREA Composite REIT Index          MSCI Asia Pacific AC Equities Index
                                JPM Government Bonds - Asia Pacific

Source: APREA

As global economies struggle to find their way to recovery from the economic downturn caused by
the pandemic, it is generally expected that interest rates are likely to remain at relatively low levels in
nearly all major economies in the near term. What this may mean for the performance of REITs is
two-faceted. While the uncertain global economic prospects implied by low interest rates may cast
doubt on the growth of REITs earnings and dividends, their cost of debt - which REITs traditionally rely
heavily on - would also be lowered. In addition, having historically displayed low correlations to many
of the major asset classes, REITs offer attractive diversification to investors, a key consideration for many
investors especially in the current situation.

IV. Challenges and Opportunities for Hong Kong
   Over the years, the Government and regulators have worked continuously to introduce policy
   enhancements for REITs, which have been well received by market players. To list out a few initia-
   tives that have been rolled out since the publication of the 2013 FSDC Research Paper:

              • In 2014, the REIT Code was amended to give REITs the flexibility to invest in property development
                projects and financial instruments, subject to limitation. Since then, a number of REITs have
                made use of the extra flexibility to hold financial instruments and property development projects.
                One REIT has completed a property development project.3

              • In May 2020, the MPFA revised the guidelines to improve MPF investment options, among which
                included expanding the asset allocation and markets for REITs, lifting the restriction of no more than
                10% of the assets of MPF funds invested in REITs listed in Hong Kong, the UK, the US or Australia.

              • In December 2020, the SFC amended the REIT Code upon completion of an industry consultation,
                providing H-REITs with more flexibility in making investments which include allowing REITs to
                invest in minority-owned properties; allowing REITs to invest in property development projects
                in excess of the existing limit of 10% of gross asset value (GAV); and increasing the limit on
                aggregate borrowings to 50% of their GAV. Up to date of this report, two REITs have invested in
                minority-owned properties since the REIT code was amended.

   1. Untapped Potential of H-REITs

   Despite the collective efforts, Hong Kong’s REITs market has not been the most vibrant among its
   Asian peers, as shown by the following metrics.

   Market capitalisation – As at the end of March                                         Number of listings – As of the end of March
   2021, total market capitalisation of REITs in Hong                                     2021, there were 12 listed H-REITs (2 suspended),
   Kong, Japan, Australia and Singapore stood at                                          comparing to 43 in Singapore, 49 in Australia
   US$31 billion, US$150 billion, US$110 billion and                                      and 61 in Japan.
   US$79 billion, respectively. Similarly, as for
   free-float market capitalisation shown below, Hong                                      Figure 7. Number of REITs listings (2017 – March 2021)
   Kong’s REITs market has also been lagging
   behind other major markets in the region.                                              70

   Figure 6. REITs free-float market capitalisation                                       50
             (2008 – 2020)
US$ billion

              80                                                                                   2017               2018          2019          March 2021
              60                                                                                          Australia    Hong Kong    Japan    Singapore
                                                                                          Source: Stock Exchange of Hong Kong (HKEX), Singapore Exchange
                                                                                          (SGX), Investment Trust Association of Japan, Australian Securities
               0                                                                          Exchange (ASX), China International Capital Corporation
               2008      2010        2012    2014     2016      2018       2020
                         Australia     Hong Kong     Japan     Singapore
  Source: APREA

              SFC, Consultation Paper on Proposed Amendments to the Code on Real Estate Investment Trusts (June 2020),

Trading value – Trading of REITs in Hong                                        The chart below, which shows the proportion of
Kong is not as active as in other APAC markets.                                 REITs represented in the GPR General Quoted
On an average day in 2020, trading value of                                     Index4, offers an interesting angle on the
H-REITs was US$77.8 million, a fraction of the                                  acceptance of REITs in different countries by the
US$227 million in Singapore and US$301                                          international financial community. Evidently, the
million in Australia (converted at 2020 year-end                                proportion of REITs versus non-REITs in Hong
exchange rate).                                                                 Kong is significantly lower than in all other
                                                                                countries concerned, perhaps to some extent
Figure 8. Average daily trading value of REITs in 2020                          revealing a higher preference given to other listing
                                                                                vehicles, mainly listed companies, over REITs for
                                                                                making investments in Hong Kong real estate.
                                                                                Figure 9. Proportion of REITs in listed real estate represented
300.0                                                                           in GPR General Quoted Index (as at December 2020)

250.0                                                                           100%
200.0                                                                            80%
150.0                                                                            60%
 50.0                                                                            30%
    0.0                                                                          10%
            Hong Kong             Singapore             Australia                 0%
                                                                                         Australia      Hong Kong         Japan          Singapore
Note: Converted to US$ at year-end exchange rates
                                                                                                             REITs Non-REITs
Source: HKEX, SGX, ASX, Bloomberg                                               Source: Global Property Research, APREA

To gauge what growth potential lies ahead the H-REITs market, another benchmark is the capitalisation of
REITs as a percentage of equities. As shown in the chart below, market capitalisation of REITs as a
percentage of the equity market generally ranges from 5.9% in Australia to 0.4% in Hong Kong, with
Singapore being the exception, where the REITs market has undergone tremendous growth compared
to other sectors in the past years. Granted, this ratio offers only a rough reference point, as it reflects
the distinctive structures of the various markets which, in Hong Kong’s case, are characterised by its
enviable equity markets. Nonetheless, it presents an idea of the room for growth for H-REITs in terms
of market capitalisation, if their potential can be fully tapped into.

Figure 10. Market capitalisation of REITs as percentage of the stock market as at March 2021
                  Hong Kong              US           Australia          Japan           Canada              UK           Singapore
Source: Bloomberg, FSDC
    Global Property Research General Quoted Index is a subset of the GPR General Index with a base date of 31 December 1983 and tracks over 600 of the
    largest real estate companies worldwide with over US$50 million in market capitalisation.

2. Capturing Growth Opportunities

REITs are organic components of the financial services industry, and should not be left out in the
bigger picture of Hong Kong as an international financial centre for a multitude of reasons. In addition to
the 7.9% of total employment created by the financial services industry (including insurance) in
Hong Kong, the real estate industry alone accounts for another 4.3%, as at the end of 20205. In the
face of the fundamental transformation driven by digitalisation, REITs have a part to play in facilitating
and financing such transformation. Zooming in on Hong Kong, ample growth opportunities lie ahead
to be captured to revitalise Hong Kong’s REITs market.

Synergising REITs with existing public initiatives

At present, the H-REITs market has relatively limited choices of underlying asset types, with the
majority of H-REITs investing in residential and commercial properties such as shopping malls, office
buildings, industrial buildings and hotels. The result of such a lack of diversification in REITs assets
could lead Hong Kong to missing out on the growth momentum presented in the logistics, infrastructure,
healthcare and other emerging sectors.

Figure 11. Free-float market capitalisation by industry Sector (as at the end of 2020)



      US$ billion





                              Australia                Hong Kong                        Japan                       Singapore
                          Diversified      Healthcare      Hotel      Industrial       Office      Other      Residential       Retail
Source: APREA

Revitalising the REITs market has merits beyond just commercial. When explored in tandem with
other public efforts, synergy can be created to achieve more for our city. For example, integrating
transportation infrastructure across the GBA presents tremendous opportunities for logistics companies
that have warehouse assets across the region, which can potentially become quality REITs assets in
turn. Considering REITs in the bigger context of such infrastructure integration, such upgrading will
bring new opportunities for the financial market while supporting the Government’s efforts to foster
flow of goods, capital, information – and naturally, people - across the GBA. Similarly, other areas
including construction of local infrastructure, improvement on healthcare facilities, promotion of the
use of 5G can also be explored.

    Census and Statistics Department, “Quarterly Report on General Household Survey, October – December 2020” (published in February 2021), https://ww-

Capturing regional growth

In addition to local assets, overseas issuers, particularly those in emerging markets in Asia and
along Belt and Road, are also gaining prominence with the rapid urbanisation of their economies.
Hong Kong, having long successfully played the role as a super-connector and investment gateway,
has great potential to grow into a regional REITs hub if proactive actions can be taken to capture
such cross-boundary / cross-border opportunities. Among others, dividend withholding tax governed by
the home jurisdictions would affect returns and appeals of REITs’ underlying assets – and, therefore,
the city’s role as a REITs hub.

Mobilising the offshore RMB pool

One of Hong Kong’s unique strengths is its deep RMB liquidity pool at an enviable level of around
RMB 750 billion.6 Although the first RMB-denominated REIT was listed on the HKEX as early as in
2012, more RMB REIT listings are yet to be seen, and the same holds for the first dual currency trad-
ing REIT. Exploring the role of REITs in RMB internationalisation can expand the range of RMB prod-
ucts available, whereby improving the attractiveness of Hong Kong REITs.

Riding on the C-REITs and GBA momentum

Mainland authorities’ announcement to pilot and foster infrastructure REITs in China (C-REIT) and the
subsequent promulgation of relevant supporting documents and rules - the latest of which include
detailed implementation rules by the Shanghai and Shenzhen Stock Exchanges. As of 6 May, five
REITs had filed their listing applications at the Shanghai Stock Exchange, and four at the Shenzhen
bourse.7 It presents an unprecedented window for Hong Kong to further its REITs market riding on
this momentum.

REITs can also be considered in combination with the development of the GBA, through which Hong
Kong’s close economic and financial ties with the Mainland have been strengthened further and to
which infrastructure construction is a key driver of the integrated growth. REITs can be utilised to
further improve the efficiency of resource allocation in infrastructure in the GBA, to promote the
implementation of the current economic growth strategy and the adjustment of financial structure,
helping with the industrial upgrading in the field of real estate and infrastructure, invigorating the assets
of issuers and enriching the investment choices of investors.

    Hong Kong Monetary Authority, Monetary Statistics for March 2021,
    Shanghai Stock Exchange,; Shenzhen Stock Exchange,

V. Policy Recommendations
With an aim of furthering Hong Kong’s REITs markets, the FSDC has formed a dedicated Working
Group comprising industry experts to look into relevant matters. As a revisit to FSDC’s previous
research paper on REITs and based on market views consolidated by the Working Group, the following
policy recommendations are proposed.

Among others, liquidity has been identified by the Working Group and practitioners as one of the
most critical components for a REITs market to sustain its appeal to market participants. For investors,
higher liquidity is associated with higher trading efficiency, lower trading costs and lower price volatility;
for sponsors, higher liquidity translates into ease in capital raising and fairer price valuations; for
intermediaries, more deals and transactions taking place in more liquid markets means more business
opportunities and naturally, more resources invested in the line of business. Most importantly, liquidity
links each and every one of the market participants together and creates a virtuous cycle for the
market to grow organically and sustainably.

In this connection, the Working Group proposes the following policy recommendations around the
central objective of increasing market liquidity in six areas:

 • Refining the REITs value proposition;

 • Tapping into cross-boundary investor base;

 • Diversifying REITs product offerings;

 • Exploring tax and financial incentives;

 • Implementing regulatory enhancements expeditiously; and

 • Stepping up market promotion and regulatory communication.

The FSDC also notes that the announcement to foster development of REITs in the Policy Address
2020 and the subsequent announcement to provide subsidies for REITs in the 2021-2022 Budget
have both been well received by market practitioners. With collective efforts by all stakeholders, Hong
Kong’s REITs market is poised to reach new heights.

1. Refining the REITs Value Proposition

From the age of farming to industrialisation and then digitalisation, the way the land is deployed for
utility and economic output has gone through profound changes. For this reason, how real estate
assets are defined, and correspondingly, how the REITs market is developed, should be revisited
from time to time.

Hong Kong long prides itself in the city’s well-established legal system, simple and low tax regime,
strong capital raising capabilities, and abundance of world-class professional service providers and
talents. These competitive advantages have proven to be the cornerstones of the vibrant financial
markets, and widely apply to all kinds of financial products and services, the real estate market
included. However, in the face of the competitive landscape of global REITs, it is believed some of
these unique edges that resonate the most with the international financial community, which previously
may not have been articulated enough, should be highlighted more in a refined, more consolidated
value proposition of Hong Kong REITs.

Among others, it is believed Hong Kong’s established regulatory regime which allows various asset
types to list as REITs, Hong Kong’s simple and low tax regime, as well as the vibrant offshore RMB
asset market, have much value to bring to the REITs market.

(i)    Hong Kong welcomes different kinds of income generating assets to list as REITs

A clear message should be conveyed to highlight that Hong Kong is welcoming of different asset
types to list as REITs, although not many precedents can be referenced. A REIT is defined in the
SFC’s REIT Code as “a collective investment scheme constituted as a trust that invests primarily in
real estate with the aim to provide returns to holders derived from the rental income of the real
estate”, and should dedicate investments in real estate that generates recurrent rental income, and
distribute a significant portion of income to unitholders in the form of regular dividends, inter alia, to
be authorised by the SFC. In other words, there is no restriction as to what industries H-REITs can
invest in and Hong Kong is ready for and welcoming new asset types to be listed as listing.

Actions speak louder than words. It is reported that a logistics-related REIT, sponsored by a key player
in the Mainland’s logistics market that will inject three logistics centres located in the Mainland and
Hong Kong, filed its listing application8 on 10 Feb 2021 and started marketing the public offering on
5 May. Scheduled to debut on 17 May, it may have been successfully listed by the time this paper is
published, to become the first logistics related REIT in Hong Kong. If so, it would provide much refer-
ence for simlilar assets, addresing concerns of potential REITs sponsors over uncertainty of the regu-
latory approach towards new REITs asset types.

(ii) Hong Kong’s simple and low tax regime benefits REITs

Globally, there are a number of jurisdictions that provide specific preferential tax treatment for REITs
in an effort to increase their overall attractiveness. For instance, the Inland Revenue Authority of
Singapore (IRAS) provides tax transparency treatments for eligible REITs in Singapore. Without a
similar arrangement in Hong Kong, one may be given the inaccurate impression that H-REITs are in
a significantly disadvantaged position in terms of taxes.

For this reason, it should be emphasised that Hong Kong’s territorial tax system, which does not
impose tax on offshore profits, dividends or value-added tax (VAT), automatically applies to H-REITs.
What this means for REITs is exemption from profits tax and VAT. For investors, either local or foreign,
individual or institutional, no tax is imposed on capital gain or dividend income from investing in
REITs. These terms could in fact be more preferential, subject to circumstances, as compared to
some leading markets.

    HKEX News,

(iii) Dual currency trading is available for REITs

Dual currency trading can provide REITs with the flexibility to manage currency risks by potentially
aligning the currencies in which revenues are received and dividends distributed. Dual currency
trading is generally welcomed by REITs and Exchange Traded Funds (ETFs), particularly in cases
where the underlying assets and the listed instruments are denominated in different currencies. In
the Singapore market, for instance, 13 of the 15 dual currency products listed on the Singapore
Exchange are ETFs and REITs.9

Although Hong Kong is yet to welcome the first dual currency REIT, the supporting market regime
and infrastructure has been in place. The Dual Tranche, Dual Counter (DTDC) model10 introduced in
2011, which allows issuers to list two tranches of shares and ETFs in different trading currencies, has
been running smoothly since its establishment. More importantly, what underpins the attractiveness
of trading in RMB is the deep RMB liquidity pool, currently at a level around RMB750 billion, a significant
amount of offshore capital looking to be invested in RMB denominated assets.

2. Tapping into Cross-Boundary Investor Base

Hong Kong has long been the investment gateway to and from the Mainland. The introduction of the
Shanghai-Hong Kong and Shenzhen-Hong Kong Stock Connects was a milestone achievement that
further cemented this role and opened the door for Mainland and international investors to trade in
each other’s markets. Nonetheless, not having been included as eligible securities under the Stock
Connect schemes yet, REITs have not been able to leverage these existing connectivity regimes.

In this connection, it is proposed to include REITs as eligible securities under the Stock Connect
schemes, thereby allowing two-way REITs investment in each other’s market. Initially, when the first
listed C-REIT is still on the way, such arrangement can start with ‘Southbound’ first, namely allowing
eligible Mainland investors to invest in H-REITs. Such would present an opportunity for Mainland
investors to participate in a well-established offshore REITs market in advance of the official rollout
of C-REITs, whereby accumulating evaluation and trading experience and paving way for the development
of C-REITs.

Once the C-REITs become available, the arrangement can be expanded to two-way trading, allowing
both Mainland and Hong Kong / international investors to invest in available REITs products in each
other’s market. The benefits would be on different levels: international capital seeking to increase
their stake in Mainland assets, particularly in infrastructure sectors, will be granted such access conveniently;
Mainland investors looking to diversify their global allocation can leverage the platform to invest in
regional and global real estate assets through Hong Kong.

In short, inclusion of REITs under the Stock Connect schemes will not only be an expansion of the
existing market connectivity mechanisms, but also facilitate the efficient matching of real estate
assets with cross-boundary capital, supporting regional economic growth and restructuring, thus
establishing Hong Kong as a regional REITs investment hub. To take one step further, if and when an
“ETF Connect” will become possible in the future, REIT ETFs should also be considered for being
included as eligible products under “ETF Connect”.

     Singapore Exchange, List of Securities with Dual Currency Trading, available at
     HKEX, Dual Tranche, Dual Counter Model, available at

Another effective way to increase trading liquidity is to introduce a market making mechanism for
REITs. By serving as counterparts of buying and selling orders, market makers can bring immediate
liquidity to the market. In fact, market making is available for a REIT ETF listed on the HKEX, as well
as for options on an H-REIT. Similar market making mechanisms can be applied to REITs themselves,
and certain incentives, for example, discounted trading fees, can be considered by the HKEX to
encourage initial participation. Once market liquidity is gradually built up and a critical mass formed,
H-REITs can thrive on its own on a fast-growing trajectory.

3. Diversifying REITs Product Offerings

As mentioned earlier, the underlying assets of REITs are becoming increasingly diversified in leading
markets. More infrastructure, logistic parks, data centres, healthcare facilities, residential housing
including retirement housing and student housing, are being listed and traded in the form of REITs.
It is worth noting that the key to building competitiveness in REITs, as from experience of the most
influential markets, is to establish an ecosystem around REITs that consists of both traditional and
new real estate assets and a variety of financial products derived from REITs, as well as a cluster of
issuers, investors, analysts and other service providers around REITs.

As of the completion of this report, all of the 10 H-REITs listed and traded are more traditional in
terms of underlying assets, mostly holding general residential and commercial properties in their
portfolios, such as shopping malls, office buildings, industrial buildings and hotels. With Hong Kong
being the world’s second largest biotech financing centre, tier 1 data centre hub in Asia11, as well as
the “super-connector” for the Belt and Road Initiative, there is much room for H-REITs to grow by
bridging the financing gaps in these markets.

One example would be the rising investor interest in quality healthcare assets resulted from the COVID-19
pandemic. Currently, these investors would have to turn to other markets for such investment opportunities
in healthcare REITs. More important than the apparent commercial benefits, healthcare REITs, and
REITs in relation to social security housing / government subsidised housing for the elderly, will stimulate
development of and investment into these asset classes which may benefit the local community.

     CBRE, Asia Pacific Data Centre Trends H1 2020,

Another area for growth is infrastructure. As mentioned in Our Hong Kong Foundation’s Land and
Housing Policy Research Report, there has been insufficient investment in local infrastructure, leading to
the gradual loss of the competitive edge of the logistics industry12. Likewise, the long investment
cycle and uncertain exit channels are main concerns of capital mulling over Belt and Road projects
which are mostly infrastructure related. For reasons mentioned earlier, Hong Kong is uniquely positioned to
build an edge by providing more varieties in the underlying assets of H-REITs, to appeal to a broader
range of investors with different risk appetites and investment preferences.

REIT ETF is another investment vehicle that can potentially draw investors’ interest and deepen
market liquidity. REIT ETFs, either passively or actively managing their REIT holdings, can help
investors broaden their investment portfolios by accessing overseas REITs, as well as diversifying
their exposure at lower costs. Hong Kong, with only one REIT ETF, displays room for improvement.

In view of this, the FSDC proposes:

 (i) Promoting H-REITs as a competitive structure for listing real estate assets in healthcare, logistics
     parks and infrastructure sectors. Given the fact that in the past, REITs underlying assets have
     been highly concentrated in more traditional sectors, and thus not much prior reference can be
     drawn for sponsors and intermediaries wishing to list other types of assets as REITs, the SFC
     should consider providing guidance and clarity on the regulatory implications for such listings, so
     that potential sponsors and intermediaries are provided clarity in this regard.

 (ii) Encouraging REIT-related product innovation. Internationally, different types of financial instruments
      have been explored and introduced to some leading markets as a means to provide liquidity
      and cater to different needs of trading. Singapore introduced the first REIT ETF to the Mainboard
      in 2016; currently, there are three REIT ETFs listed on the SGX. In Japan, there are a total of 20
      REIT ETFs traded in the Tokyo Stock Exchange (TSE)13.

Hong Kong, with the first REIT ETF launched only recently in October 2020, should consider devel-
oping more REIT ETF products, particularly those investing in H-REITs. A deep and liquid REIT ETF
market would also be in line with the Mainland’s REITs ambitions, and when the conditions allow, can
potentially pave the way for introducing innovative cross-boundary H-REIT / C-REIT hybrid ETFs.

REIT futures would be another example of REIT-related product innovation - in August 2020, the SGX
launched Asia’s first international REITs futures based on indices tracking diverse REITs listed in
Singapore, Hong Kong, Malaysia and Thailand14- another instrument that Hong Kong can explore in
the future.

     Our Hong Kong Foundation, Land and Housing Policy Research Report,
     Japan Exchange Group, ETFs listed on TSE (updated as of Feb. 8, 2021),
     Singapore Exchange Media Centre, SGX pioneers Asia’s first international REIT futures,

4. Exploring Tax and Financial Incentives

While costs would affect attractiveness of a listing venue for REITs and others, cross-boundary listing
of REITs assets would also bring about additional tax implications. To capture REITs potential arising
from regional partners, treatment of dividend withholding tax in the home jurisdictions, such as the
Mainland and other Southeast Asian countries, can be explored. Market participants also agree that
listing and ongoing compliance costs of REITs are generally higher than those of listed companies,
largely due to regulatory and compliance requirements specific to REITs, such as the requirement of
having a professional external trustee. Costs incurred at the REIT level would affect the distributable
profits to investors and thus undermine its attractiveness to investors, which may partly explain why
some major REITs markets provide specific tax incentives for REITs.

(i)   Tax treatment in Singapore and Japan

Singapore - Certain distribution requirements need to be satisfied for REITs to receive tax transparency
treatment, under which no tax will need to be paid at REIT level, whereas listed property companies
will be subject to corporate income tax at the company level. Distributions of REITs out of taxable
income are exempted for resident and non-resident individual investors, while taxed at 17% for
resident corporate investors. As for non-resident corporate investors, the applicable tax rate is 10%
based on a tax concession expiring in December 2025. Upon the expiry of the tax concession
arrangement, distributions to non-resident corporate investors may be subject to the prevailing
corporate tax rate (currently at 17%).

Japan - Concessionary real property acquisition taxes at 0.6% to 1.6% are provided to REITs in
Japan as compared to an ordinary property acquisition taxes at 3% to 4% payable by listed property
companies when acquiring assets.

(ii) Tax treatment in Hong Kong

As mentioned earlier, H-REITs are treated as collective investment schemes constituted as unit
trusts, and therefore can benefit from profits tax exemption. Combined with no tax on capital gain
and dividend income, this puts Hong Kong in a strong position in terms of tax competitiveness. However,
as pointed out by some market participants, there remains room for improvement. At present, the tax
exemption applies only to H-REITs themselves, and not to the property holding special purpose vehicles
(SPVs), which are required to be set up if H-REITs are holding assets such as hotels, recreational
parks or serviced apartments. Furthermore, H-REITs are subject to property taxes on rental income
received from Hong Kong properties, while the property holding SPVs will be generally exempted
from property taxes.

It is common for REITs to seek to expand their portfolios through asset acquisition. For Hong Kong
REITs, which typically hold their properties via SPVs, such transfers of properties normally take the
form of sale and purchase of the shares of the SPVs, which are subject to stamp duty of 0.1%. However,
in the case of a direct transfer of non-residential properties, the transfer will be subject to buyer’s
stamp duty at up to 4.25%, which is relatively higher than that of Singapore at up to 3% and that of
Japan at up to 1.6%.

The absence of tax advantages available for H-REITs makes it difficult for H-REITs to differentiate
themselves from listed property companies with similar business nature from a tax perspective. As
part of Hong Kong’s overall strategy for REITs, a review of the existing tax policies with regard to
REITs is warranted. Consideration should be given to the necessity of potentially providing tax incentives
in areas including the following:

(a)   Property tax on REITs;
(b)   Profits tax on asset holding SPVs;
(c)   Tax for transfer of properties acquired by REITs; and
(d)   Stamp duty on trading REITs.

Another effective way to incentivise and attract new issuers and assets is through financial grants.
The FSDC notes and welcomes the Government’s announcement in the 2021-2022 Budget that subsidies
will be provided for qualifying REITs authorised by the SFC and listed in Hong Kong in the coming
three years, and will cover 70 per cent of the expenses paid to local professional service providers
for the listing of REITs, subject to a cap of $8 million per REIT. The FSDC would encourage ongoing
consideration of extension and further incentives to stimulate and harness the opportunities for Hong

5. Implementing Regulatory Enhancements Expeditiously

As mentioned earlier, takeover and mergers are common ways for REITs to grow their businesses
and, more active asset transactions contribute to the growth in the size of REITs and hence their
liquidity. However, as previously noted in the 2013 FSDC Research Paper, such restructurings of
H-REITs suffer from two key regulatory difficulties:

 • “Absence of “squeeze-out” provisions facilitating takeover of a REIT. Unlike listed companies,
   there is no mechanism in the REIT Code for the offeror to take out the recalcitrant minority
   unitholders, no matter how small they are, resulting in a complete takeover of H-REIT practically

 • Non availability of “scheme of arrangement” in the privatisation of a REIT. Similarly, there
   is no equivalent provision for H-REITs to effect a scheme of arrangement, which is binding on all
   shareholders, including those who object to the scheme proposal, to the extent approved in
   meeting by shareholders and/or creditors (representing 75% present and voting in person or by
   proxy) and sanctioned by court.”

Making reference to the 2013 FSDC Research Paper, the FSDC would like to restate the proposal
that legislative changes should be considered to facilitate compulsory acquisition and scheme of
arrangement for H-REITs. Legislative amendments should be made to extend their application to
listed collective investment schemes; the SFC should also consider issuing a Practice Note on their
application to ensure minority unitholders of H-REITs are accorded the same level of protection as
shareholders in listed companies. In a nutshell, the same takeover / privatisation tools available to
Hong Kong listed companies should also be available to H-REITs as they represent the same economic
features and substance, and hence should be provided a level playing field.

Despite the fact that, for various reasons, no solution has been put forward since then, the FSDC
gladly notes that the SFC’s “Consultation Conclusions on Proposed Amendments to the Code on
Real Estate Investment Trusts” issued in 2020 acknowledges such issues, and states that it would
consult the Government for the way forward. Expeditious implementation of such regulatory
enhancements would be welcomed by market participants.

Relatedly, it is stated in the same Consultation Conclusions that a REIT may adopt a “stapled structure”
with its units stapled with securities of another listed entity provided that similar governance and
investor protection measures are in place and requirements in the REIT Code are complied with in
substance. The stapled structure is commonly used by business trusts in Hong Kong. Recently,
there has been a transaction15 which involves privitisation by way of a ‘scheme of arrangement’. It is
suggested that the SFC should give a clear guidance on the applicability of law-based privatisation for
REITs adopting a stapled structure in the future.

6. Stepping up Market Promotion and Regulatory Communication

With a refreshed REITs value proposition, expanded investor base and product basket, Hong Kong
can form a more coherent and comprehensive approach to promoting REITs. As one of the earlier
Asian markets to have introduced REITs, Hong Kong presents competitive advantages to a spectrum of
market participants, including REITs sponsors, managers and trustees, as well as institutional and retail
investors. A more targeted promotional approach would ensure the information they need is readily
available for these target audience groups from the region and around the globe.

(i)     International Promotion

Fortunately, Hong Kong can build on its reputation as an international financial centre, to establish
and expand its REITs market base. Particularly, as many of our neighbouring Asian economies and
Belt and Road countries have been going through expedited urbanisation in recent years, tremendous
infrastructure financing needs may arise, presenting a potential growth driver for Hong Kong.

With this, more emphasis should be given to regional and international promotion of H-REITs to
establish Hong Kong as the regional go-to market. One way of doing so would be to dedicated REITs
events, such as “REITs day”, which would be helpful in bringing the concept of REITs closer to investors.
In addition, REITs should be highlighted in the comprehensive product universe that Hong Kong has
to offer in various overseas delegates and promotional efforts.

     Listed company disclosure,

(ii) Targeted Marketing by Investor Type

It would also be beneficial to explore more targeted marketing strategies for different types of investors
to raise awareness of REITs and deepen their understanding of the unique characteristics of REITs. As
mentioned previously, the expected sustaining low interest environment has left some institutional
investors searching for yield while minimising risk exposure. A risk return profile similar to REITs
would present considerable appeal to these investors, in particular to those with relatively low risk
appetites and longer investment horizons, such as pension funds and insurance companies. In
Hong Kong’s future endeavours to engage with these investors, REITs should be highlighted among
others in our product basket.

On the other hand, reaching out to retail investors is equally important as they are active participants -
holding 16% and 21% of the US and Singapore REITs as of 201916, respectively, and contributing to
market liquidity. Whilst educational materials for retail investors have been developed by relevant
regulators and agencies, including the dedicated webpage on the Investor and Financial Education
Council (“IFEC”) website17, more diversified channels and platforms with information in varied details
can be further explored to deepen retail investors familiarisation with REITs.

(iii) Swift and Transparent Regulatory Communication

While it is widely recognised that investor protection lies at the core of financial regulators’ mandates, and
regulatory standards should not be compromised to achieve market development, certain service
level commitments by relevant regulators would be highly appreciated by market players.

The setup of the designated telephone hotline and enquiry email by the SFC in July 2020 is a timely
example of such efforts. The dedicated desk, which is to answer REIT related comments and enquiries
from market participants and the public, is expected to be helpful in facilitating communications.
Similar measure for expediting communications with market players and potentially shortening the
processing time for application approvals - key consideration factors in choosing the listing venue –
will be welcomed by the market.18

Additionally, continuous regulatory clarity for professional service providers, such as REITs sponsors
and managers, would be highly helpful in allaying their concerns over compliance and operational
matters and encourage more to consider utilising the H-REITs structure. For this, both Japan17 and
Singapore19 have collated simplified booklets for existing and potential REITs sponsors and mangers’s
quick information. We note that “Hong Kong regulatory regime for REIT”, prepared the SFC, was
published in July 2020 to facilitate understanding of the market.20

     China International Capital Corporation, Report on China Infrastructure REITs (中國基礎設施 REITs 系列研究總報告), December 2020
     IFEC, Real Estate Investment Trust,
     Tokyo Stock Exchange, J-REIT Guide Book,
     Monetary Authority of Singapore, Compliance Toolkit for Real Estate Investment Trust Managers,
     Securities and Futures Commission, Hong Kong regulatory regime for REITs (July 2020),

VI. Conclusion
The well-established financial infrastructure, sophisticated market participants and deep real estate
market in Hong Kong lay a strong foundation for the further growth of REITs. More concerted efforts
by the Government and regulators following the supportive measures announced in the 2020 Policy
Address and 2021-2022 Budget and are highly anticipated by market participants and are believed
to bring additional growth momentum.

Our 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 the REITs market. Some prominent trends
not to be overlooked include the digital transformation of business models, the lasting impact of COVID-19
on the investment environment and investor appetites, the steady urbanisation and corresponding
infrastructure needs of emerging economies, and last but not least, the ever-closer connectivity with
the Mainland market. The FSDC believes now is an ideal window to brush up our REITs capabilities
to stay relevant and competitive in an era of change.

While this paper focuses mainly on REITs, it is noted that there have been a number of positive developments
for investment funds and private equity funds, including tax treatments thereof. It is also noted that Hong
Kong is home to a number of listed properties companies and property-management-companies.
Accordingly, building an attractive capital market for real estate, including Mainland real estate, is
important to Hong Kong’s position in the international financial landscape, to which the FSDC
believes a strong REITs market would bring much value.

The FSDC hopes that the recommendations set forth in this paper can help nurture an ecosystem for
real estate financing with expanded market depth and enhanced liquidity. As always, the FSDC
looks forward to working closely with various stakeholders to further develop the REITs market and
cement Hong Kong’s position as an international financial centre.

Appendix. Cross-Market Comparison of REITs Regimes
Regulatory regime

                                                    Mainland                                                 United
                Hong Kong        Singapore                              Australia           Japan
                                                     China                                                   States

 Legal form     Trust           Trust             Fund         Trust or                Trust or         Trust or
                                                  investing in Company                 Corporation      Corporation

 Must be        Yes             No, but listing   Yes                 No               No               No
 Listed                         is necessary
                                to qualify for

 Primary        Securities and Monetary           China               Australian     Tokyo Stock        Securities
 Regulatory     Futures        Authority of       Securities          Securities and Exchange           and
 Agency         Commission     Singapore          Regulatory          Investments                       Exchange
                                                  Commission          Commission                        Commission

 Regulatory     REIT Code        Securities and   Guidelines on       Managed          Act on         Securities
 Framework      with reference Futures Act        Public Offering     Investment       Investment     Exchange
                to listing rules and Code on      of Infrastructure   Schemes          Trusts and     Act
                                 Collective       Securities          under            Investment
                                 Investment       Investment          Corporations     Corporations
                                 Schemes          Fund                Act              and Securities

 Distribution   90%+ of         90%+ of           90%+ of             No mandatory 90%+ of              90%+ of
 requirements   audited net     taxable           audited             distribution      distributable   taxable
                income after    income to         distributable       requirement, profits               income
                tax             enjoy tax         profits              but undistrib-
                                concessions                           uted earnings
                                                                      may be taxed
                                                                      at the highest
                                                                      marginal tax
                                                                      rate at 49%. To
                                                                      mitigate this, it
                                                                      is standard
                                                                      practice to
                                                                      100% of the
                                                                      taxable income
                                                                      of the REITs.

Regulatory regime (continued)

                                                     Mainland                                                   United
                  Hong Kong           Singapore                          Australia           Japan
                                                      China                                                     States

 Restriction on   No                 No            Yes                 No               No                 No
 foreign assets

 Restriction on   75% of gross   Prohibited        Only allowed        Not allowed to   Not allowed to     75%+ of
 investments      asset value of from investing    to hold 80%+        carry out        engage in          profits from
                                 in vacant land
                  real estate that                 in infrastructure   trading          activities other   real estate-re-
                  generates      or mortgages;     projects that       business,        than asset         lated income;
                  recurrent      10%- of           generate            such as          management         75%+ of
                  rental income; deposited         stable income       developing                          assets from
                                 property can      with 3+ years       land for sale,                      real estate
                  Combined       be invested in    of operations       otherwise the                       assets, cash
                  value of       property                              flow through                         items and
                  minority-owned development and                       treatment will                      government
                  properties,    uncompleted                           not be                              securities
                  property       property                              received
                  and other
                  shall not
                  exceed 25%
                  of gross asset

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