Hong Kong SFC To Relax Restrictions On Overseas Investments By REITs

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

01 April 2005

The Hong Kong Securities and Futures Commission has released proposals for the relaxation of geographical restrictions on investments by SFC-authorised REITs (real estate investment trusts), which are being put to public consultation during the month of April.

The SFC’s plan is divided into three key areas, and the proposals seek to:

• Lift the geographical restrictions so that REITs may invest in real estate anywhere in the world;
• Issue a Practice Note focusing on the obligations of REIT managers when investing in overseas investments; and
• Consider a series of initiatives to further facilitate the development of REITs as an investment product.

According to the SFC, the proposed Practice Note provides “concrete” guidance on the application of the provisions in the Code on REITs when investing in overseas properties and recommends that:

• All REITs are regulated on the same regulatory principles;
• There will be no separate sets of rules for different jurisdictions;
• The REIT manager must have the requisite competence and conduct proper due diligence;
• Each of the parties involved in a REIT (manager, trustee, valuer, auditor, etc) has its duties and responsibilities; and
• There must be clear and proper disclosures of risks in investing overseas.

Additionally, the SFC has also invited the public to comment on a series of other initiatives for the REIT regime, including:

• Recognition of property portfolio management expertise directly for REIT managers' licences;
• A review of the gearing ratio; and
• Acceptance of special product features, such as payment of management fees by the way of issuance of units, provided that there are proper safeguards in place.

Mrs Alexa Lam, the SFC's Executive Director of Intermediaries and Investment Products, observed:

"After 18 months of intensive discussions and research by the Taskforce on Overseas Real Estate Investments by REITs, we believe this is the right time to lift the geographic restriction."

She went on to add that:

"The most important ingredients in the management of a REIT are the expertise and integrity of the manager and its ability to conduct proper due diligence in light of the risks relevant to the jurisdiction(s) that a REIT invests in. The draft Practice Note emphasises not only the REIT manager's responsibility to conduct due diligence, but also its duty to assess, mitigate, manage and disclose all relevant risks in relevant overseas property investments."

The one-month consultation will end on 30 April 2005, following which the SFC expects to launch the new REITs regime in June 2005. In the meantime, interested parties are invited to approach the regulator to discuss their business plans and proposals.

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