Real estate has long been the name of the game in Hong Kong. Almost everyone with the financial means to do so dabbles in property speculation, from aspiring young professionals to established tycoons. So pervasive is this citywide “pastime” that i-Cable and NOW TV both have regular shows dedicated to property market updates, analyzing price trends and reviewing of new housing development projects.
Hongkongers’ obsession with real estate investment, however, is hugely inefficient. Towers of matchbox-sized flats sit idle as developers wait for favorable market conditions to sell. Owners often leave apartments vacant as the potential gains from a lucrative sale – or at least it is hoped – far outweigh the foregone rental payments. Hong Kong prides itself in efficiency; speculators just want to buy and sell something for a quick buck. So why waste all this concrete?
In the past decade, Real Estate Investment Trusts (REITs) have gained popularity around the world as a means of investing in real estate. A REIT is a vehicle – an investment portfolio – that owns and operates real estate, such as office buildings, apartments, shopping malls, hotels, or warehouses. Holding a REIT is equivalent to owning a share of the underlying properties.
A REIT’s price reflects the value of its real estate holdings, and regulation usually requires that REITs pay out over 90 percent of its income in the form of dividends. Like stocks, REITs are often listed on exchanges, so they can be readily traded with just a few mouse clicks. As such, they present a direct and hassle-free way to buy and sell properties, without having to deal with troublesome tenants or fixing broken light bulbs and leaky pipes. Despite Hong Kong’s investment-savvy reputation, however, its REIT market remains woefully underdeveloped.
Australia, Japan, and Singapore all have active REIT markets, each offering a wide selection of securities representing a range of property sectors. In contrast, Hong Kong is home to only eleven REITs, five of which represent properties in China, leaving very few choices for local real estate investment.
Locally, the most well-known REIT is perhaps The Link (0283.HK), notorious for its exploitative rent practices, particularly against small businesses, but that’s another matter entirely… Even emerging markets such as Malaysia and Thailand, which began developing REIT legislation far later than Hong Kong, have now surpassed the SAR in their offerings, both in terms of number of listings available and breadth in the types of properties represented.
Why is Hong Kong lagging behind its peers? A vibrant REIT market increases the accessibility of real estate investment. Without having to worry about mortgages, taxes, or prohibitively costly down-payments, anyone with a stock brokerage account can buy shares of a REIT. In most cases, REITs represent broad portfolios of real estate holdings, offering investors greater choice and diversification.
Furthermore, by allowing various commercial and industrial properties to absorb some of the “hot money” traditionally destined for punting the residential market, house prices may even cool slightly, taking some pressure off the city’s long-standing housing problems. Financial institutions stand to gain, too; increased trading in these instruments will fuel creation of innovative products: Exchange Traded Funds and derivatives based on REIT indexes, for example. Finally, for risk-averse investors like retirees, REITs typically exhibit lower volatility than stocks and can serve as a robust source of recurring income through dividend payments.
Back in the bricks-and-mortar world, greater participation in the REIT market will not necessarily require building anything new. Existing office buildings, hotels, serviced apartments, or shopping centers (Hong Kong has no shortage of these) can all be “securitized” (repackaged) into REITs and made available for trading. Given the obvious benefits, Hong Kong’s investment community ought to swiftly embrace this financial innovation. Sadly, this is falling on deaf ears. Hong Kong’s bourse, under Charles Li’s leadership, has largely become a “one-trick pony,” interested only in attracting Chinese money and courting foreigners attracted to Chinese money.
In October, the Financial Services Development Council warned that regional competitors including China, Korea, Taiwan, and Singapore have all outpaced Hong Kong in terms of developing and promoting new financial products. The regulator – the Securities and Futures Commission – seems equally clueless and behind-the-times. Perhaps it is still trying to wrap its head around the whole Lehman “minibond” debacle from almost seven years ago…