Most HK REITs unlikely to build investment properties: Fitch

Without exceeding 10% cap.

Fitch Ratings says that a proposal to allow Hong Kong (HK) real estate investment trusts (REITs) to develop investment properties is not likely to immediately change the REIT industry. 

This is because most of the HK REITs would easily breach the regulator's limit on project size if they develop an investment property on their own. Also, the trusts generally prefer to acquire assets with stable cash flows from their sponsors.

Here's more from Fitch Ratings:

The Securities and Futures Commission recently published a consultation paper that proposed to allow HK REITs to redevelop the investment properties in their portfolio or develop an investment property project on vacant land, provided the cost of development does not exceed 10% of a REIT's gross asset value (GAV). This proposed change brings the HK REIT code in line with the practice in Singapore.

Most of the HK REITs are unlikely to be able to build an investment property without exceeding the 10% cap, in view of their size constraints and the high land cost in Hong Kong.

Alternative strategies available to smaller REITs to participate in development and remain within the 10% cap - redevelopment of existing assets; development via JVs; and development of assets in China, where land costs are significantly lower - are likely to entail more risk and uncertainty about yields than buying completed projects with stable cash flows from their sponsors. As a result, HK REITs will likely stick to their strategy of acquiring stable assets from their sponsors because this will help the REITs to sustain steady distribution rates.

The exception may be large trusts, like The Link REIT, which had a GAV of HKD104bn at end-September 2013. The Link REIT may be able to immediately take advantage of the proposed rule change to improve its asset yields by redeveloping some of its retail centres that do not have efficient floor layouts while remaining within the 10% cap on project size.

However, over the longer term, Fitch believes that the change could attract more China-based REITs to list in HK. These REITs may be involved in joint development of investment properties in China with their sponsors.