Cheung Kong To List Its First Hong Kong REIT

by Mary Swire, Tax-News.com, Hong Kong

04 July 2005

Cheung Kong Holdings, the property company of Hong Kong billionaire Li Ka-shing, is to list its next real estate investment trust (REIT) in Hong Kong after favourably reviewing new guidelines on property trusts released by the city's financial regulator last month.

"We have carefully studied the guidelines and we find it very encouraging, and there are good opportunities to list our REITs in Hong Kong," the firm's executive director, Justin Chiu told Bloomberg, adding that the guidelines "will help grow the REIT market in Hong Kong."

Hopes that Hong Kong could soon rival nearby Singapore as the regional REIT centre of choice were dashed earlier this year when the world's largest REIT listing was stalled over legal action. The launch of the massive $30 billion REIT offering based on government real estate holdings was set to take place last December, but Lo Siu-lan, an elderly resident of government-owned accommodation argued that the deal undervalues the assets, and could lead to higher costs for tenants. The legal action forced the postponement of the REIT launch and was an embarrassing incident for the Hong Kong authorities.

In March, the Securities and Futures Commission published proposals to allow SFC-authorised REITs to invest in overseas properties. During the one-month consultation period, 19 responses were received and they unanimously supported the relaxation of the geographical restriction and the proposal to regulate all SFC-authorised REITs under the Code on REITs. Responses were also generally in favour of the SFC's initiative to raise the gearing ratio and to consider special product features, such as payment of management fees by way of REIT units.

According to the SFC, the major points to note in the consultation were that:

• The geographical restrictions on overseas investments would be lifted so that REITs may invest in real estate anywhere in the world;
• The experience in managing property portfolio investments would be recognised as a core competence for the purpose of assessing the qualification of a REIT management company;
• The gearing ratio would be raised to 45% of gross asset value of a REIT;
• Additional layers of special purpose vehicles may be considered in special circumstances;
• Proposals to take out professional indemnity insurance and title insurance would be removed; and
• Special product features may be considered by the SFC on a case-by-case basis – e.g. payment of management fees by way of units.

"The Code has been drafted in a flexible manner with an aim to accommodate new product features as the REIT market develops," Alexa Lam, the SFC's Executive Director of Intermediaries and Investment Products, noted.

"Thus the SFC is prepared to consider new product features, such as different types and means of structuring management fees, so long as investors' interests are not prejudiced, there are adequate safeguards to prevent conflicts of interests, and there is proper disclosure of these features to the public," she added.

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