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Following is a speech by the Secretary for Financial Services and the Treasury, Mr Frederick Ma, at the Hong Kong Institute of Surveyors Annual Conference today (July 15):
Distinguished guests, ladies and gentlemen,
I am delighted to join you at the Annual Conference of the Hong Kong Institute of Surveyors (HKIS) today. As the professional organisation representing the surveying profession in Hong Kong, HKIS has been promoting the betterment of the surveying industry through the setting of surveying standards, establishing a code of ethics and promoting continuing professional development. Today's conference, which aims at exploring Real Estate Investment Trusts (REITs) from various perspectives, is one of the Institute's many efforts in this regard.
Against the backdrop of a rapidly developing REIT market, this conference provides a timely opportunity and platform for regulators, industry practitioners and participants to exchange views on the prospects and opportunities of REIT market development in Hong Kong.
Hong Kong as an international financial centre
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Allow me to begin by giving you an overview of the Hong Kong financial markets. Hong Kong is an international financial centre (IFC) by all standards. With a high degree of liquidity and an effective and transparent regulatory regime that is on a par with international standards, our financial markets provide an excellent investment and fund-raising platform. Currently ranked eighth globally and second in Asia in terms of market capitalisation, our stock market has come a long way in becoming a major centre for capital raising and securities trading. It overtook Japan as Asia's number one equity fund-raising platform in 2005, and ranked fifth worldwide. Our market capitalisation now stands at about HK$9,800 billion, which is about seven times our GDP. Our asset management business, with total assets amounting to HK$3,600 billion, has grown remarkably in the past few years. We are the world's 15th largest banking centre with about 70 of the world's top 100 banks operating in our very small yet vibrant city. With 174 authorised insurers, Hong Kong also has the highest concentration of insurers in Asia. All these speak louder than words in showcasing the standing of our financial markets in the world.
Hong Kong's development as an IFC is premised on a number of fundamental strengths. To name a few, these include a well-established financial infrastructure, rule of law, a stable and free flow of currency, and in particular, a low and simple tax regime. The Government, the financial regulators and the market practitioners have over the years strived very hard to foster an attractive environment conducive to business and investment. There is, however, no room for complacency. In face of the increasingly globalised financial markets and keen competition among other IFCs, the Government is mindful that diversification of products and services is essential in further enriching our financial markets and positioning Hong Kong as a vibrant and ever-growing IFC.
The REIT market in Hong Kong
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Today's global financial markets are developing fast, both in terms of magnitude and diversification. We need to maintain and strengthen the competitiveness of our financial markets and keep pace with international development and practices. To this end, the Securities and Futures Commission (SFC) is committed to facilitating market development and product innovation while bearing in mind investors' interest. The introduction of REITs was a significant milestone in the continuing diversification of our financial markets. Indeed, with more product choices, different investors' various investment and hedging needs can be catered for, thereby further increasing the attractiveness of our capital market.
Notwithstanding the relatively short history with the first REIT only listed in November last year, the Hong Kong REIT market is picking up quickly. The listing of the Link REIT, the first REIT in Hong Kong, is so far the largest IPO of REIT in the world. I am sure Victor, who will speak after me, will have more to share on the successful story of this landmark REIT, which is gaining increasing popularity among investors. Currently with a total of four REITs, the capitalisation of our REIT market amounted to US$6.3 billion with an average daily turnover of US$48 million during the first six months of 2006. The yields of these REITs range from 4% to 7%. Not only did these REITs attract substantial interest at the time of public offering, they continue to be actively traded in the secondary market. With our REIT market firmly established, more REIT offerings are expected which will in turn fuel the impetus for its further growth.
REIT as an alternative investment means
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The introduction of REITs in Hong Kong is opportune as the public awareness and demand for wealth management and financial planning have been increasing over the years, with more and more of the investing public looking for different investment means to maximise returns. Originated in Australia and the US more than 20 years ago, REITs have gained popularity in Asia in recent years, particularly in Hong Kong, Japan and Singapore. Supported by a robust real estate market, it won't be long before REITs become one of the most popular investment vehicles in Hong Kong.
REITs aims at delivering a source of recurrent income through investments in income-generating real estate properties. The product provides an alternative investment means for both property owners seeking to liquidate their investments in properties for other opportunities, and investors wishing to invest in properties without substantial capital outlay. REITs provides investors with a new access to and enhanced liquidity of real estate which were not available previously, bringing a win-win situation for all. The attraction of REITs among investors also lies in the relatively stable income they offer. As such, investors may choose to invest in REITs for the regular dividend and as a means to diversify their investment portfolios.
Initially, REITs authorised in Hong Kong were limited to real estates located in Hong Kong, in accordance with SFC's Code on REITs. Noting the desirability of granting REITs the flexibility of investing in overseas properties which would in turn offer investors more investment choices, the SFC decided to lift the geographical restrictions after thorough consideration and consultation with the market. The Code on REITs was thus revised in June 2005 to allow SFC-authorised REITs to invest in overseas properties, including those in the Mainland. With the relaxation, REITs can provide a new channel for investors looking for investment opportunities in other real estate property markets, particularly those in the Mainland which are ever-expanding. The role of REITs as an investment means and the development prospects of the Hong Kong REIT market have therefore been greatly enhanced. From the taxation point of view, the Hong Kong tax regime for REITs is highly competitive. When a Hong Kong listed REIT invests in overseas properties and remits its overseas sourced income or profits to Hong Kong, they would not be subject to any Hong Kong tax under the territorial concept of our tax system. At the investor level, we do not impose any tax on dividend income received by individuals or institutional investors from Hong Kong REITs. On the contrary, overseas jurisdictions have to make specific tax concessions to REITs in these aspects in order to facilitate the development of REITs there.
Prospects for further growth
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With our cultural and linguistic affinity with the Mainland, Hong Kong is the ideal platform for investors seeking to tap into the vast Mainland market. In particular, Hong Kong is uniquely positioned to attract REITs that invest in Mainland properties, given our knowledge of the Mainland's regulatory environment and their way of doing business, and our track record of raising capital for Mainland enterprises. The Guangzhou Investment (GZI) REIT, which invests in office and retail properties in Guangzhou, is not only the first REIT listed in Hong Kong spinning off Mainland properties, but also the world's first REIT that is 100% invested in Mainland properties. Apart from REITs, we have also seen the recent IPOs of several companies which all invest in Mainland properties. This demonstrates the enthusiasm of investors in reaping benefits from the Mainland market which has enormous growth opportunities.
Many expect that the further growth of the Hong Kong REIT market will be supported by the sale of properties by Mainland real estate owners. Owing to the lack of a REIT market in the Mainland at present, Mainland real estate owners wishing to package their real estate properties as REITs have to seek listing in other markets. Given the size of the Mainland real estate market and investor's demand for attractive yields and access to Mainland's robust economy, the growth potential of REITs investing in Mainland properties is substantial. Nevertheless, Hong Kong must not lose sight of the challenges facing us. Our rivals are all gearing up to compete for a bigger slice of the lucrative Mainland market, as reflected in, among other things, their keen interest to master the Chinese language. The cover story of a recent Time Asia Magazine entitled "¾Çº~»y" or "Get Ahead! Learn Mandarin" talks about how Mandarin has emerged as the new must-know language. According to the report in the magazine, there are currently 160,000 students studying the Chinese language in South Korea. In Japan, Mandarin is now the most taught foreign language after English. I said these just to demonstrate how keen the competition Hong Kong is facing, as it has ever been. To stay ahead, we must always get ourselves prepared for competition.
Coming back to the REIT market development in Asia, both Hong Kong and Singapore have achieved positive growth. In terms of size, the four Hong Kong listed REITs had an aggregate market capitalisation of US$6.3 billion, compared with the 10 listed REITs in Singapore of around US$7.8 billion. In terms of liquidity, REITs in Hong Kong record a daily average turnover of US$48 million for the first half of 2006, more than double of Singapore's US$19 million. It is no exaggeration that whether Hong Kong can position as a preferred platform and rise as the major REIT market in Asia hinges on our ability to attract more high quality REITs, in particular those spinning off from Mainland properties. I strongly encourage our financial services industry and relevant stakeholders of REITs to continue to capitalise on Mainland opportunities, keeping their Mainland counterparts abreast of the developments of the Hong Kong REIT market and inviting them to make use of our highly liquid platform in launching REITs. In the long run, our aspiration for the Hong Kong REIT market is to attract a new universe of quality real estate assets managed by internationally renowned houses. We very much hope and would like to see a broad range of REIT products with local, Mainland and other overseas assets coming to the Hong Kong market, which would add to the depth and breadth of our REIT market.
Surveyors in REITs
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Let me now turn to the opportunities available to the surveying profession in Hong Kong with a growing REIT market. Hong Kong is blessed with a strong surveying profession, with some 4,200 professional surveyors. Over the years, the surveying industry has been contributing significantly to Hong Kong's real estate market and the economy as a whole. With the introduction of REITs, the surveying sector is faced with new challenges, or opportunities depending on how you look at it, in property valuation and assessment. As the Principal Official looking after Hong Kong's financial services sector, I believe Michael (Suen) will be in a much better position to give his insights about the surveying industry in Hong Kong. I am, nevertheless, delighted to share with you my views on the role of Hong Kong's surveying industry in the further development of our REIT market.
Surveyors of different disciplines are involved in the various stages of a REIT product. As acquisition of quality properties is one of the crucial factors of the success of a REIT, the due diligence process by professional surveyors is also essential in ensuring investors a fair chance to make informed investment decisions. For instance, building surveyors play the role as property consultant to assess the physical condition of the properties to be acquired by a REIT. General practice surveyors are also actively involved as property valuers in the pre- and post-listing stages of REITs to carry out independent property valuation for associated properties. Surveyors in other streams and other professionals such as market consultants are also engaged in providing professional services and advice on different aspects of REITs.
The examples that I have just mentioned help to illustrate that the surveying industry is part and parcel of REITs and, hence, the REIT market development in Hong Kong. It is expected that with more REITs to be listed on our stock market, more and more professionals from the surveying sector will be engaged. I hope that you will make the best use of today's conference to find out more about REITs so as to better prepare for the challenges and opportunities ahead.
Concluding remarks
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Ladies and gentlemen, I do not wish to take up any more of your time. I understand that speakers from the SFC and various stakeholders will speak on different aspects of REITs. I am sure they will provide further details and insights regarding the opportunities presented by the further development of our REIT market.
In closing, may I wish you all a very successful conference.
Ends/Saturday, July 15, 2006
Issued at HKT 10:05
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