The Hong Kong Securities and Futures Commission (SFC) has released a consultation paper on proposed revisions to the Hong Kong Code on Real Estate Investment Trusts (REIT Code)1, inviting comments from market participants until 10 August 2020.
The proposed changes relate to several longstanding key provisions including:
- relaxing the present restrictions on acquiring minority-owned properties;
- increasing the permitted investment limit for property development activities;
- increasing the borrowing limit to 50% of the REIT's gross asset value (GAV); and
- aligning the connected party transaction, notifiable transaction and disclosure requirements with those applicable to other listed entities in Hong Kong.
These revisions will allow more flexibility for REITs to make acquisitions, which would enhance their liquidity and potentially attract new REIT listings in Hong Kong.
The SFC has proposed various substantial and miscellaneous amendments to the REIT Code, with detailed explanations for their approach.
1. Minority Holdings
- REITs are currently required to have "majority ownership and control" in each of their properties. However, to provide a certain degree of flexibility, REITs are allowed to hold minority-owned properties if the aggregate value of such properties does not exceed 10% GAV.
- It is now proposed that REIT managers be given greater flexibility to invest in minority-owned properties:
- Minority-owned properties that can satisfy certain conditions (e.g. the REIT manager having veto rights over certain key matters pertaining to such properties) will be classified as "Qualified Minority-Owned Properties" and not subject to any investment restrictions; and
- Minority-owned properties that cannot satisfy the conditions will be classified as "Non-qualified Minority-owned Properties", and the value of any such property must not exceed a single investment cap of 10% GAV. Such properties will also, together with other specified investments, be regarded as "non-core investments" that are limited to 25% GAV in aggregate.
- The SFC has also proposed that the current diversification limit applicable to Relevant Investments be lifted from 5% to 10% GAV, to align with the single investment cap applicable to investments in a Non-qualified Minority-owned Property.
2. Property Development
- It is proposed that the existing limit of 10% GAV for Property Development Costs and the contract value of uncompleted units of real estate can be exceeded, subject to obtaining specific approval from unitholders (including to modify the REIT's trust deed) and prior consent of the trustee.
- As with Non-qualified Minority-owned Properties, such investments will also be regarded as "non-core investments" that are limited to 25% GAV in aggregate.
3. Borrowing Limit
- The SFC proposes to increase the borrowing limit from the current 45% GAV to a maximum of 50% GAV, to help facilitate the further growth of REITs through acquisitions.
- The SFC will also clarify in the REIT Code that where this limit is breached solely as a result of a decline in property values or other reasons beyond the control of the REIT manager, disposal will not be required where such disposal would be prejudicial to the interests of unitholders, but no further borrowing will be permitted.
4. Connected Party and Notifiable Transactions, and Disclosures
- Consistent with the SFC's long-established policy to regulate REITs in the same manner as listed companies, the SFC is proposing to amend the REIT Code so that, unless otherwise specified, all connected party transactions and notifiable transactions will be regulated in a manner consistent with the requirements of the Listing Rules promulgated by The Stock Exchange of Hong Kong Limited (Listing Rules).
- This will include amendments to connected party provisions relating to:
- the definition of "connected persons";
- whether a transaction is regarded to be a "connected party transaction" or "continuing connected party transaction";
- whether an exemption is available for the type of connected party transaction and the conditions for any such exemption;
- applicable unitholder approval, disclosure and reporting requirements;
- content requirements for announcements, circulars and annual reports; and
- annual review and other requirements for continuing connected party transaction.
- Notifiable transaction provisions will also be revised with respect to:
- their definition, classification, notification, publication and unitholder approval requirements;
- whether an exemption is available; and
- content requirements for announcements and circulars.
- For similar reasons, a clarifying note is proposed to be added to the REIT Code requiring REIT managers to additionally have regard to, among other things, the requirements applicable to listed companies under the Listing Rules when considering disclosure obligations.
5. Miscellaneous Amendments
- The SFC has also proposed various miscellaneous amendments to the REIT Code, to better align requirements and codify existing practices, for example, to remove the limitation on REITs holding properties through more than two layers of special purpose vehicles.
Talk to us!
This public consultation is important as it provides an opportunity to help shape the implementation of a revised Hong Kong REIT regime that facilitates consistency and transparency for investors, as well as the same potential growth for REITs as an asset class compared with other listed investments.
Submissions for the public consultation on the REIT Code are due by 10 August 2020. If you would like to collaborate on a submission, or have any questions on the above matters, please liaise with your usual contact at Baker McKenzie or the lawyer listed in this client alert.