Since March this year, the introduction of China's pilot policies on infrastructure REITs raising and affordable housing REITs has accelerated. The system design and market characteristics of REITs in Hong Kong, China may provide some ideas.
The development of REITs in Hong Kong, China.
Legal Supervision: tighten the front and loosen the back, and gradually "flexible". The code for real estate investment trusts (hereinafter referred to as the code) adopted by the China Securities Regulatory Commission in Hong Kong in August 2003 is the core legal basis of REITs in Hong Kong, China. From 2005 to 2020, the code underwent five revisions, gradually relaxing the requirements in terms of investment area, investment scope and leverage ratio, and gradually "flexible".
Organizational structure: typical contract type. At present, Hong Kong, China only allows REITs to be established in the form of contract (trust) and adopts the external management mode. From the perspective of various systems, REITs in Hong Kong, China are close to (or even more stringent) developed economies in terms of investment scope, asset structure and leverage ratio.
Tax policy: the preferential intensity is high. 1) At the stage of purchase and disposal, the gains from the sale of real estate by the seller are exempted from 17.5% income tax, and the assets purchased by the buyer are subject to different stamp taxes according to categories; 2) At the stage of holding and operation, real estate tax and stamp tax shall be levied, and the dividends generated from holding real estate through SPV shall be exempted, but the rental income of the project company shall normally pay enterprise income tax; 3) In the dividend stage of investors, the dividends and capital gains of REITs investors are tax-free. Compared with the United States, Hong Kong, China has greater tax advantages, and investors are completely tax-free, which has a strong attraction.
Development scale: far less than China's stock and bond market and developed REITs market. At present, there are 11 listed REITs in Hong Kong, China, totaling HK $223.83 billion, but far less than stocks and bonds. In 2021, REITs are only equivalent to 0.6% of the size of the stock market and 9.3% of the size of the bond market. The growth rate of REITs in Hong Kong, China is also relatively stable. From 2005 to 2021, the average annual compound growth rate (CAGR) of REITs market value was 10.6%, and the CAGR of stock market and bond market expansion in the same period were 10.8% and 8.7% respectively. From the perspective of the underlying assets of REITs, retail real estate accounts for more than 60% all year round, which is led and contributed by Hong Kong's largest REITs.
Investment characteristics of REITs in Hong Kong, China.
Feature 1: the overall cost performance is better than that of stocks and bonds. Since 2005, the annualized yield of Hang Seng REITs price index is 3.7%, while the yield of Hang Seng price index and 10-year government bonds in the same period are 1.9% and 2.1% respectively. Since 2008, the annualized returns of the full return Hang Seng REITs index and the full return hang seng index considering the dividend payout rate are 16.7% and 8.4% respectively. The volatility of REITs is also significantly lower than that of the stock market. Since 2005, the Hang Seng REITs index and hang seng index have been 15.9% and 23.7% respectively.
Feature 2: liquidity is weaker than stocks. REITs in Hong Kong, China are closed-end funds, and the long-term allocation demand of institutions is strong, so the liquidity is relatively weak. Throughout history, the average daily turnover rate of leading exhibition and wealth purchase is more than 0.3%, which is not low compared with the average turnover rate of 0.32% of the benchmark Hang Seng 50 index, but the turnover rate of Chunquan, Huixian and the rich is less than 0.1%, which is relatively low.
Feature 3: low correlation with stocks and bonds. Throughout history, the correlation between the Hang Seng REITs index and the Hang Seng Index in Hong Kong, China is 0.57, which is completely irrelevant to the yield of 10-year government bonds, indicating that REITs has a certain ability to disperse risks. However, under the impact of epidemic liquidity in 2020, the withdrawal of REITs is significantly higher than that of the stock index, indicating that the defense ability of REITs is not perfect.
Risk tip: the understanding of the development of REITs in Hong Kong, China is not in place.
