Econ 310 Financial Institutions in Hong Kong Group 5 Real Estate Investment Trusts

The Development of REITs in Hong Kong—Is REITs are appeal to Hong Kong investors?

Objectives To provide a clear picture of development of REITs in Hong Kong. To see whether REITs can appeal to Hong Kong investors. Ivy 033002

Agenda Introduction of REITs Background of REITs 3. REITs in Hong Kong 2.1 What is REITs 2.2 History of REITs 2.3 Types of REITs 3. REITs in Hong Kong 3.1 History of REITs in Hong Kong 3.2 Factors contributing to REIT Ivy 033002

4. The Main Considerations of Investors 4.1 Benefits of Investing REITs 4.2 Quality of the Assets 4.3 Management of Assets 4.4 Possible Risks of Investing REITs 5. Example of REITs in Hong Kong: the LINK REIT 6. Conclusion Ivy 033002

Introduction Ivy 033002

Introduction The attraction of Real Estate Investment Trusts (REITs) has been sweeping over the world. According to REITs Index in Morgan Stanley (MSCI) at the end of 1999  288 Points to in the February of 2005 885 Points. 200% in these five years. Though Hong Kong is an international financial market, the development of REITs is just on the introduction stage with only one REIT-- The Link Ivy 033002

Background of REITs Ivy 033002

What is REITs? A REIT is an investment that, through an initial public offering (IPO), investing in real property. It normally distributes all or most all of its profits to investors as dividends on a regular basis. REITs can be performing either as a company or as a unit trust. They can either be self-managed or appoint a third party management company to manage their investments. Ivy 033002

History of REITs The origins of REIT was in 1880s This tax advantage was reversed in the 1930s, and all passive investments were taxed first at the corporate level and later taxed as a part of individual incomes. President Eisenhower signed the 1960 REIT tax provision. REIT investment increased throughout the 1980s. The Tax Reform Act of 1986 allowed REITs to manage their properties directly In 1993 REIT investment barriers to pension funds were eliminated. Today, there are more than 193 publicly traded REITs operating in the United States and their assets total over $500 billion. However, REITs are relatively a new investment classes in the region of Asia. Ivy 033002

Types of REITs The REITs industry has a diverse profile, which offers many alternative investment opportunities to investors. Most of REITs are identified by their property types or by geographical. Generally, there are typically three broad types of REITs: Equity REITs, Mortgage REITs and Hybrid REITs. Ivy 033002

Equity REITs Equity REITs own and operate income-producing real estate Obtain the revenue mainly from the renting of these properties. Most of the REITs in the market is the Equity REIT Ivy 033002

Mortgage REITs Focus on providing loans directly to real estate owners and operators. Mortgage REITs would extend credit indirectly through the acquisition of loans or mortgage-backed securities Ivy 033002

Hybrid REITs This type of REITs refers to an investment strategy that combines those of an equity REIT and a mortgage REIT Therefore, this type of REITs may invest in a range of assets, including physical properties, mortgages or other types of related financial instruments. Ivy 033002

M.C. Q. Typically, how many types of REIT are there? 2 3 4 5 None of the above Ivy 033002

History of REITs in HK The Code on Unit Trusts and Mutual Funds: Authorized funds are prohibited from industry in any type of real estate (including building) or interest in real estates. Development of REITs is prohibited Patrick 033022

History of REITs in HK In 2003 The Securities and Futures Commission begins to conduct an in-depth research on the regulatory experience the United States, Singapore, Australia, Japan and Korea Patrick 033022

History of REITs in HK In March 2004 The Code on Real Estate Investment Trusts is proposed The foundation of REITs trading practice in Hong Kong financial markets Patrick 033022

History of REITs in HK 領匯房地產投資信託基金 泓富房地產投資信託基金 越秀房地產投資信託基金 Patrick 033022

Factors contributing to REIT development 1. A focused investment strategy provide a stable and a certain investment target for investors only invests in property business such as rent 2. Scalable investment in a diversified portfolio Invests in a portfolio of balanced, diversified and large-scale property business Small investors are need not to contribute a large sum of capital Patrick 033022

Factors contributing to REIT development 3. Accessibility and tradability Can be traded on major board of stock exchanges Corporation information can be accessed 4. Tax transparency Dividend distribution will not be taxed at the REITs level but taxed at the individual level Clear and transparent policy avoids duplication and vagueness of taxation Patrick 033022

Factors contributing to REIT development 5. Transparency of REITs Information of REITs corporations should provide sufficient details to investors. Builds investors’ confidence 6. Attractive yields Profit of REITs is earned from rental income Much a stable income than profits of property business which rely on land and property sale Patrick 033022

MC Which one is/are the contributing factor(s) of REITs in foreign countries? ( a ) Scalable investment in a diversified portfolio ( b ) Accessibility and tradability ( c ) Transparency of REITs ( d ) Taxation Vagueness ( e ) a , b & c

The Main Considerations of Investors Vicky 033020

The Attractions of REITs Return Dividend - Pay at least 90 percent of their taxable income to shareholders - Form of dividends yield each year Vicky 033020

- Dividends yield is the main index of REITs return income Singapore - 6% or above Australia - 7 to 8.5% - United States’ Treasury bonds also can be an index - Attractive if REITs’ return is higher than Treasury 3 % Vicky 033020

Diversification Portfolio - Reducing risk - Real estate markets fluctuate by location and property type - Investors decide to buy REIT properly diversified Vicky 033020

The Quality of Assets - Main factor that affecting the value adding of REITs - Increase the quality of assets: - rearranged the combination of store - revamp - adept in use up all area - Demand of commercial buildings Rate of rent Vicky 033020

M.C. How much percentage must pay of their taxable income to shareholders in the form of dividends yield each year? At least 85% 99% At least 90% 100% None of the above Vicky 033020

The management of assets Profitability and assets appreciation are closely associated to the manager’s ability Understand the track record of the managers and their team

Possible Risks of Investing REITS Performance of Property Market total return of REIT is subject to the performance of the property market Economic Downturn: market price decreases underlying properties in value return from REIT may

Possible Risks of Investing REITS Climbing of Interest Rates low interest rate environment : investing REIT is relative more attractive high interest rate environment : REIT less attractive and even less profitable because: higher opportunity cost

Possible Risks of Investing REITS Potential Political Factors The LINK’s first plan of listing was hindered by indictment Cannot ensure no similar indictment again Affect the trust unit price

MC Time Again! Which of the follow risk is not mentioned? Potential Political Risk Poor performance of Property Market Climbing of interest rate Possible Disasters

Example of REITs in Hong Kong The LINK has been listed on the Hong Kong Stock Exchange on 25 November, 2005 first REITs in Hong Kong 180 retail and car park facilities Wilson 033029

Example of REITs in Hong Kong The Characteristics of The Link required to pay the dividends not less than 90% of the total distributable income yield rate of The Link is around 6.1% Wilson 033029

Example of REITs in Hong Kong Diversification Portfolio there are 180 retail and car park facilities approximately 960,000 sq.m of retail space and around 79,000 car park spaces well-diversified geographically minimal dependency on any single property Wilson 033029

Example of REITs in Hong Kong Management of Assets invest in sustainable-income producing properties in Hong Kong which are primarily used for retail and car park purposes focus on long-term income and capital growth. Wilson 033029

Example of REITs in Hong Kong Possible Risks of Investing REITs Occurrence of the Catastrophe outbreak of SARS affected the regional economy in Asia and Hong Kong beware the effects of Bird Flu occurrence of SARS or other high infective diseases a huge blow to Hong Kong economy Wilson 033029

Example of REITs in Hong Kong Climbing of Interest the higher the interest rate  the lesser the attraction of the REITs higher attraction in other securities like treasury bond and some good credit rating corporate bonds lower the attraction of the REITs Wilson 033029

Example of REITs in Hong Kong Potential Political Factors listing process was completely ceased The previous indictment from Ms. Lo Sau Lan Link states that there would be further indictment challenges. can’t ensure the market price will not be affected by the indictments Wilson 033029

The Price Trend of The Links from 25/11 to 16/12 Wilson 033029

The Argumentative Issue since the Listing Date Can the assets in The Links be sold out? Can the Manager in The Links be changed? Can the Trustee of The Links be changed? Can The Links take part in high risk investment activities?

Members List Chan Ching Yi, Ivy 033002 Chu Yik King, Vicky 033020 Tai Ming Yu, Patrick 033022 Ma Chun Wai, Wilson 033029 Wong Ching Ming, Karen 033033

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