Enhancing the REIT market in Hong Kong: A tax chapter

Author: Wilson Cheng, EY Hong Kong and Macau Tax Leader

The recent legislation waiving stamp duty on the transfer of Real Estate Investment Trust (REIT) units in Hong Kong is a promising initiative aimed at enhancing investor retention and attraction. While this measure marks a significant milestone, there remains substantial potential to further invigorate and expand the REIT market through additional tax policy reforms. By strategically implementing these measures, Hong Kong can not only stimulate the growth of the REIT sector but also reinforce its position as a premier financial hub in the Asia-Pacific region. To shed light on these developments, Wilson Cheng, EY Tax Partner, shares his insights on REITs.

Stamp duty exemption for existing REITs acquiring new properties

Expanding the stamp duty exemption to include existing qualifying REITs acquiring new qualifying properties would encourage these REITs to grow their asset portfolios within Hong Kong. This policy could also strategically stimulate specific sectors of the property market. By reducing the transaction costs associated with property acquisitions, existing REITs may be encouraged to invest in new assets, thereby boosting growth in both the capital and property markets.

The primary benefit of extending stamp duty exemptions lies in the reduction of transaction costs for REITs. This financial relief can significantly impact the decision-making processes of REIT managers, rendering it more viable for them to acquire new properties. Lower transaction costs have the potential to yield higher returns on investment, consequently attracting more investors to the REIT market.

Moreover, this policy has the potential to channel investments toward sectors that the government intends to develop. For instance, if the government seeks to boost the commercial or industrial property sector, it can provide targeted exemptions for REITs investing in these areas. This approach not only helps in the growth of the REIT market but also aligns with broader economic development goals.

Stamp duty refund for newly formed REITs

The REIT market in Hong Kong has trailed behind other jurisdictions. As of 2024, Hong Kong has only 11 REITs, compared to 40 in Singapore. The collective market capitalization of Hong Kong’s REITs is just over a quarter of that in Singapore. 

A prominent hurdle in setting up new REITs in Hong Kong is the high initial cost. Property acquisitions incur stamp duties as high as 4.25%. When acquiring shares of property holding companies, a 0.2% stamp duty applies, necessitating restructuring pre-acquisition if the property holding company owns assets beyond the REITs’ interest. This acquisition structure demands substantial financial outlay, with the additional stamp duty serving as a deterrent. 

To invigorate the establishment of new REITs, a potential solution could involve refunding the stamp duty paid for property and shares of property holding companies upon the successful listing of the new REITs. By offering a stamp duty refund, the government can alleviate financial pressures, making it more attractive for new REITs to enter the market.

The establishment of new REITs can yield positive economic outcomes. These entities inject fresh capital, which can be deployed for property development and management. This infusion can spur job creation, boost economic activity, and foster overall growth within the real estate sector. Additionally, a more vibrant REIT market can attract international investors, further solidifying Hong Kong's position as a premier financial hub.

Profits tax incentive for qualifying REITs

Introducing a new tax incentive for qualifying REITs holding qualifying properties could enhance the appeal of REIT investments to potential investors. Additionally, the government should consider revamping the tax regime to ensure a single level of taxation, either at the REIT level or the unit holder level. This adjustment would benefit the overall REIT market and bolster Hong Kong’s attractiveness for establishing large REITs.

Lowering the profits tax rate could result in higher net returns for investors, making REITs a more appealing investment option. This could attract more capital to the REIT market, fostering growth and expansion. Similar to the patent box tax incentive, the contemplation of a reduced profits tax rate of 5% on eligible property leasing income could be considered.

There may be concerns that the impending global minimum tax regime, set to be enforced in Hong Kong from 1 January 2025, could diminish the effectiveness of the tax incentive in attracting large REIT establishments to Hong Kong. Under this regime, REITs are specifically carved out if they meet the Real Estate Investment Vehicle (REIV) criteria. 

The current REIT regime in Hong Kong might not align with the REIV definition under the global minimum tax regime due to the typical absence of profits tax at the REIT or the unit holder level. Hence, it is essential to revisit the tax regime for REITs in Hong Kong. Implementing a single level of taxation at either the REIT or unit holder level (instead of the portfolio company level) could ensure that REITs in Hong Kong satisfy the REIV requirements. This adjustment would align Hong Kong with other jurisdictions that exclude REITs from the global minimum tax regime.

These changes should be implemented by 1 January 2025. Timely implementation is vital for Hong Kong to maintain its competitiveness with other jurisdictions that have already adopted a single level of taxation. It is crucial for the government to promptly enact these changes and provide essential support to the REIT market. While the immediate impact of the global minimum tax regime may initially affect a limited number of existing REITs in Hong Kong, a single level of taxation is pivotal in attracting the establishment of large REITs in Hong Kong.

Revitalizing real estate for economic growth

Revitalizing the real estate sector is essential for driving economic growth across different sectors in Hong Kong. Given the current fiscal deficit, the economy necessitates fresh driving forces to expand. Real estate, being a cornerstone of Hong Kong's economy, has the potential to stimulate various professional services such as property agency, property management and valuation.

Implementing the new measures discussed above can serve as a catalyst for economic growth, boosting the economy and improving Hong Kong's fiscal situation. By embracing these recommendations, Hong Kong can strengthen its position as a leading financial hub and ensure the sustainable growth of its real estate market.