Real Estate Investment Trusts (REITs) Advisory Services

Real Estate Investment Trusts (REITs) provide opportunities for individuals and institutional investors to invest in commercial, industrial, residential and recreational real estate businesses. The needs of the investors present REIT operators with unique challenges not faced by other businesses in the real estate market.

REITs were first introduced by the US congress in 1960 and have since spread to real estate markets around the globe. REITs allow for more effective and efficient balance sheet management, and create liquidity and funding for new projects. Investors can diversify their investment portfolios through REITs.
In Hong Kong, REITs were established as a new asset class by the Code on Real Estate Investment Trusts which was issued by the Securities and Futures Commission of Hong Kong in July 2003, and subsequently amended in June 2005.

Why REITs?

Sponsors create REITs to unlock the underlying capital appreciation of owned real estate, enhance sponsor liquidity and provide cash flow to the sponsor's equity holders. Other benefits of REITs from a sponsor's perspective include:

• the opportunity to dispose of an entire portfolio of properties
• the chance to reorganise assets, allowing the value of the assets and cost efficiency to be maximised
• the potential to earn income from the provision of ongoing management services to the REIT
• achieving higher standards of governance with an independent trustee overseeing the operations
• obtaining access to a wider pool of investors.

For investors, REITs allow them to invest in a liquid, income-yielding asset which can give them diversified exposure to the real estate market with a much smaller scale investment than would be possible using direct investment in real estate.

What does a Hong Kong REIT structure look like?

A Hong Kong REIT may hold properties directly or indirectly through special purpose vehicles (SPVs) which are 100% owned (except in special and limited circumstances) by the REIT. There may be no more than two layers of SPVs.

What are the key practical considerations for a REIT?

As the majority of current earnings are distributed by a REIT, any fluctuation in the earnings is immediately reflected in the unit price. The market's swift reaction to changes in reported earnings is a challenge to management. Management focus is generally increased in four areas that have a direct impact on the volatility of earnings:

• Investment considerations
• Cash management
• Financial reporting
• Corporate governance.

What is the process of setting up a REIT in Hong Kong?

As the REIT formation process is complex, sponsors are advised to consult their advisors as early as possible before proceeding with a REIT transaction. The milestones involved in setting up a REIT are listed below:

• Decide on the structure
• Appoint manager, trustee, and advisors
• Consider accounting, tax and legal implications
• Prepare the legal documents
• Submit REIT application
• SFC and HKEx approval
• Listing of the REIT.

The actual time required for setting up a REIT largely depends on the complexity of the structure and the time required for responding to requests and comments from the SFC and HKEx. However, the estimated time frame between the initial thought process and completion of the offering of a REIT is normally at least six months.