SFC Proposes to Grant Greater Investment Flexibility to REITs

Source: Regulation Asia Editors, Regulation Asia 2020-06-10

REITs will be given more flexibility to invest in minority-owned properties and property development projects, and borrowing limits will be increased.

Hong Kong’s SFC (Securities and Futures Commission) has initiated a consultation seeking feedback on proposals to amend the Code on Real Estate Investment Trusts (REITs).

The proposed changes include allowing REITs to make investments in minority-owned properties, subject to certain conditions. Currently, a REIT can only invest in minority-owned property up to an existing limit of 10% of GAV (gross asset value). All other properties must be majority-owned.

Under the proposals, REITs will also be allowed to invest in property development projects in excess of the existing limit of 10% of GAV, subject to unitholders’ approval and other conditions.

The consultation says the investment restrictions applicable to REITs would include:

Core Rental Income Generating Properties: At least 75% of GAV must be invested in real estate that generates recurrent rental income at all times, and where the REIT has control or veto rights over key matters involving the properties
Non-core Investments: Not more than 25% of GAV may be invested in property development projects (including uncompleted units), non-qualified minority-owned properties, financial instruments and other ancillary investments

The borrowing limit for REITs is also being increased from 45% to 50% of GAV, to provide flexibility for REITs to make acquisitions, grow their portfolios, enhance their performance, and optimise their capital structures.

The SFC also proposes to broadly align the requirements for REITs’ connected party transactions and notifiable transactions with the requirements for listed companies.

The consultation, available here, is open for comment until 10 August.

The proposals are intended to provide Hong Kong REITs with more flexibility in making investments, to better position Hong Kong to host more REITs listings, and facilitate the growth of the Hong Kong REITs market.

As at 31 December 2019, the total market cap of REITs in Hong Kong was HKD 289 billion, a more than 40% increase in five years.

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SFC Proposes to Grant Greater Investment Flexibility to REITs

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