Hong Kong Issues REIT Guidance
Tuesday, April 12, 2011
Hong Kong’s Securities and Futures Commission (SFC) has published an
investor education article explaining key features and risks related to latest
real estate investment trust (REIT) products, particularly to those denominated
and trading in renminbi (RMB).
The article, entitled “Understanding the latest REITs in Hong Kong”
highlights, among other issues, important risks and features of REITs investing
in real estate located in mainland China. As for REITs traded and settled in
RMB, investors, it says, should also take into account the additional risk factors
associated with RMB fluctuation and convertibility.
In Hong Kong, a REIT, a collective investment scheme in a portfolio of income-generating
real estate, may borrow up to 45% of its gross asset value and has to distribute
at least 90% of its after tax net income in the form of dividends. Investors
are urged to study offering documents and consult, where appropriate, professional
advisers before making any investment decision in relation to REITs.
Currently, for example, the article points out that, while foreign interests
in property located in mainland China are generally held via a joint venture
with a finite term, the value of the REIT's investment in such real estate will
decrease over time and there will be no residual value at the end of the term.
Therefore, any suggestion that any single interest in real estate held to the
end of the term would still provide value, because of the expectation that the
real estate would appreciate in value over time, may be unsupportable.
In addition, the dividend income of a foreign corporate investor received from
an entity established in mainland China is subject to 10% withholding tax on
the Mainland. Depending on the availability of any tax treaty between the foreign
corporate investor's jurisdiction and mainland China, such withholding tax may
be subject to a preferential treatment where the taxation rate may be reduced.
In any event, it is said, such taxation charge could reduce the profit available
for distribution of a REIT holding real estate in mainland China. The offering
document of a REIT should be checked to understand the impact of the withholding
tax, and, furthermore, it should be remembered that the tax rate and policy
are also subject to change.
The units of an RMB REIT are denominated, traded and settled on the Stock Exchange
of Hong Kong in RMB. In general, distributions from an RMB REIT will be made
in RMB rather than HKD, and non RMB-based investors will be maintaining a currency
It was also stressed that an investment in an RMB REIT should not be used to
bet on the appreciation of the RMB. In addition, as the RMB is not freely convertible
and is subject to foreign exchange controls and restrictions, the liquidity
and trading price of the units of an RMB REIT may be adversely affected given
the limited availability of RMB outside of China.