Asian real estate embraces sustainable financial solutions
Buildings and construction are an underestimated polluter, but finance could help turn the sector towards a more sustainable future.
Real estate investment trusts (REITs) – listed companies that own and often operate real estate assets – offer property owners a way to monetise their asset base via the capital markets. Investors, meanwhile, gain access to a diverse portfolio through liquid listed securities that offer attractive dividends and long-term capital growth.
Last April, the Chinese government formally endorsed the REIT concept as a way of addressing long-standing concerns about high levels of debt in the property sector, kicking off a concerted effort to bring more real estate assets into the capital markets. The Chinese policy imperative has since filtered through to the Hong Kong market.
“Some of China’s developers have a lot of debt,” explained Wee Liat Lee, Managing Director, Corporate Sales at BNP Paribas in Hong Kong. “A viable REIT market provides an alternative funding channel which is market-based and pools the risk.”
Developer benefits
Taking the cue from the Chinese policy imperative, the Hong Kong government has also devised policies to support its REIT market, which had seen a hiatus in major listings since 2006 and no new offerings with mainland Chinese assets since 2011.
“Developers in Hong Kong were unwilling to spin assets off into REITs,” said Lee. “And REITs containing Hong Kong- and China-listed developers’ stocks have been in structural decline, becoming undervalued compared with their peers in the region: as a result, institutional money from the US and EU shifted toward alternatives with steadier incomes than developers’ stocks could offer.”
Hong Kong’s updated rules allow REITs to invest in minority-owned properties and invest over the existing limit of 10% of gross asset value (GAV) in projects under development. REITs now have an increased borrowing limit from 45% to 50% of GAV, double stamp duty on non-residential property transactions has been abolished and a subsidy introduced to cover up to 70% of professional service providers’ fees during the set-up phase.
“The new regulations in Hong Kong will appeal to developers who feel their shares are undervalued – floating assets in a REIT unlocks value for them,” said Lee. “And from the investor side, with interest rates likely to remain near zero for longer, institutions looking for yield will be attracted to funds giving exposure to prime locations and strong rental incomes in city centres like Hong Kong, Beijing and Shanghai.”
Lee added that attracting renowned international investors had the added benefit of diversifying developers’ shareholder registers.
Cross-border flows
In addition, Hong Kong’s Financial Services Development Council (FSDC) has proposed that REITs be tradeable on Stock Connect, enabling money from mainland China to flow into Hong Kong, and in turn, to attract global developers to list REITs there.
“We also have the possibility of dual-currency REITs, listed in Hong Kong and denominated in RMB,” explained Lee. “China-based developers will be able to tap global capital in Hong Kong – essentially, Hong Kong will leverage its mainland connections to build its REIT market.”
China-based developers will be able to tap global capital in Hong Kong – essentially, Hong Kong will leverage its mainland connections to build its REIT market.
In line with the mainland’s initial focus on infrastructure projects as the basis for new REITs, Hong Kong is well positioned to attract global investment capital for Belt & Road projects and infrastructure projects in the Greater Bay Area (GBA) via REIT listings. Mainland Chinese developers will also benefit from a more flexible capital-raising framework as they seek to meet tougher leverage requirements under the ‘three red lines’ policy.
“Starting this year, many mainland cities will hold three annual land auctions; if developers are highly leveraged they can’t bid for these new opportunities,” said Lee. “Developers who refinance through a REIT will be able to bid for more land in prime locations.”
Tapping new trends
A great advantage of the REIT concept is that specialist funds can be created that focus on specific real estate sub-sectors, from residential to commercial – allowing investors to take a view on specific growth trends.
“Logistics and data-centre REITs have sprung up in the US, Australia and Japan since the onset of the Covid-19 pandemic,” said Lee. “As e-commerce has taken off in response to consumer demand and more people work from home, property associated with this activity has gained value.”
The Hong Kong REIT market will see strong and rapid growth over the near term and could eventually become one of the largest REIT markets in the world.
Wee Liat Lee, Managing Director, Corporate Sales, Hong Kong, BNP Paribas
Illustrating this trend, mainland courier services company S.F. Holdings recently listed Hong Kong’s first logistics-focused REIT, raising HK$2.6 billion (US$334.7 million). Other asset owners are exploring similar moves, and new products linked to the market, such as specialist indices, are likely to follow, further increasing liquidity.
“The Hong Kong REIT market will see strong and rapid growth over the near term and could eventually become one of the largest REIT markets in the world,” predicted Lee. “We are currently in discussion with a number of clients who are seriously examining how they can embrace these policy incentives in a way that makes operational and business sense.
“With BNP Paribas’ global property sector expertise and our strong Greater China presence, we will be able to support our clients in their plans to invest in this market.”
