Hong Kong's Securities and Futures Commission (SFC) has begun a one-month consultation,
until February 26, 2014, on proposals to amend the Code on Real Estate Investment
Trusts (REIT Code) to introduce flexibility in their investment scope.
Since the first REIT was listed in 2005, the Hong Kong REIT market has seen
steady and stable growth in both breadth and depth. The size of the REIT market
has grown close to five times since 2005 in terms of market capitalization,
and the trading volume of the REIT market also saw sustained increase in average
daily turnover since 2009.
Hong Kongs REIT portfolios have also widened to offer investors a diverse choice
from retail properties to commercial and hotel properties, and properties in
Mainland China. The Hong Kong REIT market further saw a major milestone by listing
the world's first RMB denominated REIT in 2011.
However, taking into account the comments received following meetings by the
SFC during the past year with various industry participants, and developments
in comparable overseas jurisdictions, the SFC now considers that it is an appropriate
time to amend the REIT Code.
In essence, the proposals seek to introduce flexibility for REITs to invest
in properties under development or engage in property development activities;
and invest in financial instruments, including listed securities, unlisted debt
securities, government and other public securities, and local or overseas property
funds, subject to at least 75 percent of the gross asset value (GAV) of a REIT
being invested in real estate that generates recurrent rental income at all
The above proposals are also subject to relevant restrictions to ensure transparency
of its activities. Details of these restrictions, including maximum thresholds
on investments (such as a maximum threshold on property development investments
of up to 10 percent of a REIT's GAV), disclosure and reporting requirements,
are set out in the consultation paper.
It is said that, in considering the proposed amendments to the REIT Code, the
SFC has been mindful of the need to strike a proper balance between facilitating
market development and competitiveness on the one hand, and ensuring the protection
of investors' interests and market integrity on the other.
"These proposals have taken into account both the protection of investors'
interests and the long-term development of the Hong Kong REIT market, which
is key to Hong Kong's continued development as an international premier asset
management center," said Ashley Alder, the SFC's Chief Executive Officer.
The Commission has also noted the recent research report released by the Financial
Services Development Council (FSDC) pertaining to the development of the Hong
Kong REIT market. While the FSDC is supportive of the SFC's proposal to allow
REIT managers greater flexibility to invest in properties under development,
the FSDC has also made other suggestions.
One of the FSDC's proposals relates to the removal of profits tax on REITs.
The SFC comments that, while such removal could be expected to be beneficial
to Hong Kong REITs, it should be noted that currently, unlike other jurisdictions,
no tax is levied at individual unitholder level on dividends or capital gains
in Hong Kong.
"Therefore, a removal of profits tax could result in Hong Kong REITs becoming
completely tax-free," the SFC confirmed. "Whether this would resonate
well within Hong Kong's overall tax structure is of course a matter of government
A comprehensive report in our Intelligence Report series
dealing with the issues raised by international property investment, and the possible
taxation implications raised by such purchases, with an account of the likely (and some less
obvious) potential countries for your consideration, is available in the Lowtax
Library at http://www.lowtaxlibrary.com/asp/subs_reports.asp
and a description of the report can be seen at