Home improvement

Real estate investment trusts have been the success story of the past decade in Asia, helping companies to free up capital while giving cautious equity investors bond-like returns. This success, though, has required continual innovation and improvements to the rules, with Hong Kong currently trying to jumpstart its underdeveloped REIT market.

Proposed rule changes would allow REITs listed in Hong Kong to invest in properties under development, including vacant land as long as there are firm designs for a property. That would bring Hong Kong closer in line with Singapore and Australia, which have permitted this for years without REIT managers running riot and accumulating massive landbanks.

Even if the changes are approved, Hong Kong still has tax rules in place that make it uncompetitive versus Singapore. The SGX has again shown that it is the preferred choice with a US$1bn REIT IPO expected this month from South Korea's Lotte Shopping.

Even in Singapore, Lotte will have to shake off the disappointing performance of the two trusts to list in Asia ex-Japan so far this year.

Last month, HK Electric Investments priced its IPO at a forecast 2014 distribution yield of 7.2%. That was after hiking the yield from premarketing guidance of 5.0%-6.7% - yet it closed 2.6% below the IPO price last week.

Lotte is as blue-chip as they come, but so is HK Electric, a spin-off from Li Ka-shing's Power Assets. And like Li, the Lotte group has a reputation for pushing hard on pricing. It is hard to believe it would want to pay much more than an 8% yield to list in Singapore, even taking into account the premium that Singaporean investors usually apply to overseas assets.

The last SGX REIT listing, that of OUE Commercial Trust, also showed signs of struggling. It closed the week flat to its IPO price, but disclosures showed that one of the bookrunners had been buying heavily to stabilise the stock since the January 27 listing.

Yields may have to rise to lure investors, but REITs will remain attractive vehicles for issuers. Lotte Shopping does not have an alternative way to cash in on its properties without selling them, and the only way is up for interest rates. That should be a convincing enough argument for it to go ahead this month, and another incentive for Hong Kong to make its own REIT formula more attractive. There is plenty of ground to make up.