Inclusion of REITs in HK-Mainland Stock Connect Seen Boosting Sector

Four years after mainland investors first saw real estate investment trusts listed on local exchanges, regulators in Beijing have approved a system potentially allowing the country’s 36 REITs to be traded cross-border into Hong Kong, while also allowing wealthy mainland individuals, mutual funds and institutions to buy and sell equity in property trusts on the HKEX.

The inclusion of qualified REITs in the Stock Connect scheme linking the Shanghai, Shenzhen and Hong Kong exchanges was announced by the China Securities Regulatory Commission (CSRC) late last month, with advisors in Hong Kong pointing to what has been dubbed ‘REIT Connect’ as providing mainland investors with opportunities to invest in real estate globally.

“For a Chinese investor, Hong Kong REITs would add another product that one can choose to invest in, with different characteristics compared to mainland REITs, for example overseas property exposure,” Jeremy Ong, partner and head of Hong Kong REITs practice at Baker McKenzie told Mingtiandi, adding that the higher yields offered by Hong Kong REITs compared to their mainland counterparts could also appeal to onshore investors.

The policy announcement came just five months after the CSRC expanded the scope of its pilot REIT programme to include trusts holding retail properties, as the regulator works to expand what are now known as ‘C-REITs’ to create alternative financing channels for developers and fund managers, while also offering retail investors more options for managing their savings.

Enlarged Investor Base

With C-REITs restricted to holding mainland Chinese properties, the manager of HKEX-listed Link REIT, Asia’s largest real estate investment trust by market cap, sees REIT Connect as giving mainland investors greater access to real estate investment trusts in Hong Kong, which hold properties in the city, around the region and, in some cases, globally.

“Admitting REITs into the Stock Connect regime forms part of the overall initiatives that are aimed at further expanding mutual market access between Mainland China and Hong Kong,” George Hongchoy, chief executive of Link REIT told Mingtiandi. “For both markets, the inclusion can expand the investor base, attract more capital, increase investment alternatives, and diversify stable income options. This will serve as a catalyst to the further growth, sophistication, and maturity of the H-REIT market.”

As of September Link REIT managed a HK$238 billion portfolio of retail, office, logistics and car park properties across Hong Kong, mainland China, and overseas markets, with 11 percent of the blue chip REIT’s portfolio invested in assets in Singapore, Australia and the UK.

Also listed on the HKEX are Champion REIT, which owns the Three Garden Road office building (formerly known as Citibank Plaza) in Hong Kong’s Central district, the Langham Place office and mall in Mong Kok, and a 27 percent interest in a central London commercial complex, as well as ESR-managed Fortune REIT, which holds a portfolio of 16 retail properties across the city and a neighbourhood mall in Singapore.

Competing with Singapore

With Singapore’s REIT market roughly four times the size of Hong Kong’s as of March, REIT Connect also presents an opportunity for the asset class to build the scale and liquidity on Greater China exchanges to begin competing with the Lion City for new listings.

“If we can achieve more liquidity in the Hong Kong REITs versus those in Singapore, have an investor education campaign so that products are well understood by people here and abroad, as well as better pricing, private equity may consider Hong Kong as a relatively more attractive option for exit,” said Ong.

Hong Kong’s bourse currently has just 11 listed REITs, the majority of which hold Hong Kong and mainland Chinese assets, compared to 41 trusts listed on the Singapore Exchange, of which 17 manage portfolios comprised entirely of overseas properties, according to the REIT Association of Singapore.

Hong Kong and mainland REITs respectively rank as the third and fourth largest REIT markets in Asia by market cap after Japan and Singapore.

Investor Education Key

If Stock Connect’s current criteria for equities were to be applied, only two Hong Kong-listed REITs would be eligible for inclusion in Stock Connect, with regulators set to implement qualification guidelines for including listed trusts and a detailed timeline for the program. Baker McKenzie’s Ong points to the need for eligibility criteria which can give the sector broad appeal.

“Right now, inclusion requirements are still in early stages, but I would like to see it at a level inclusive enough where most if not all REITs would be eligible, in order to give people a variety of choice and asset classes. If thresholds are too high, you would end up having a homogenous asset class and lack of product diversity,” said Ong.

Investor education is also critical to the success of REIT Connect, particularly in mainland China, where retail investors may not be as accustomed to investing in fixed income products as in other markets, according to Ong. Link REIT pointed to REITs as an opportunity for investors in Greater China to enjoy the returns available from real estate via publicly traded vehicles.

“In more established real estate markets such as the US, Australia, and Europe, alternative investments are fast becoming mainstream,” said Hongchoy. “We expect markets in Asia to follow this trend while Hong Kong should leverage this opportunity to promote its status as an international financial centre to position itself as a key hub for REIT investments.”