Hong Kong REIT’s current regulations hinder market growth

H-REITs operate under a unit trust structure leading to capital-raising challenges.

Hong Kong’s real estate investment trust (REIT) market growth is hindered by current regulations, according to a joint report by the Hong Kong REITS Association Limited (HKREITA) and Deloitte China.

Unlike major markets, H-REITs operate under a unit trust structure leading to capital-raising challenges. Although they can use equity for funding, equity issuance approval and leverage limits restrict smaller REITs' growth.

Moreover, the REIT Code requires H-REITS to retain properties for at least two years and have a borrowing ceiling of 50% of gross asset value (GAV) compared to Japan, Australia, the US, and the UK, where borrowing is unlimited.

Additionally, H-REITs can only engage in property development activities up to 10% of their GAV, limiting their ability to leverage debt to enhance investor returns.

Unlike markets with tax transparency treatment, Hong Kong imposes a property tax of 15% on direct holdings or a profit tax of 16.5% on special purpose vehicle (SPV) rental income, impacting investor returns and sponsor interest.

Furthermore, the stamp duty on REIT property transfers reaches up to 4.25%, which could exceed a REIT's annual income and deter property owners from transferring assets to REIT structures.

“We suggest that stamp duty collection could be deferred until after successful listing, rather than requiring significant upfront payment regardless of the listing outcome,” Hubert Chak, honorary founding president of HKREITA, said.

However, industry experts are positive about the market due to strong government support from both local and mainland authorities. New policies, such as including REITs in the Stock Connect programme, are expected to boost liquidity and trading activity.

Other suggestions include lowering stamp duty for property injections into H-REITs, which could involve exempting H-REITs from stamp duty or reducing the rate to 0.2% for direct property transfers.

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Deloitte China

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