HONG KONG: Frequently Asked Questions on Real Estate Investment Trusts

Monday April 23 2012

Funds-Axis would like to draw your attention to the fact that today the Securities and Futures Commission of Hong Kong Issued a list of the Frequently Asked Questions in Relation to Real Estate Investment Trusts.

The list gives 38 commonly asked questions and detailed responses to same.

A link to the full set of questions and the associated responses can be found at the following link;

FAQ on Real Estate on Investment Trusts

For an overview of the questions answered in this Q&A Session please refer to the below where they are outlined.

Should you wish to contact the author of this article, then please don’t hesitate to email info@fund-axis.com

The questions that have been responded to in detail are as follows;

Q1:

What does SFC authorization of REIT involve?

Q2:

Can a potential REIT applicant approach the SFC to discuss its authorization requirements before submitting a formal application?

Q3:

What are some important tips to remember when submitting an application to the SFC for REIT authorization?

Q4:

Who is qualified to manage a REIT?

Q5:

How do I apply for authorization as a REIT (Application Form? Fees?)

Q6:

What are the essential conditions for REIT authorization?

Q7:

What type of REIT structure and form is acceptable?

Q8:

What about the use of Special Purpose Vehicles (SPVs)?

Q9:

Can I domicile a REIT in an overseas jurisdiction?

Q10:

Would I be able to set up umbrella REIT structures?

Q11:

Are there restrictions as to the types or geographical locations of properties that a REIT can invest in?

Q12:

Are all REITs required to fully comply with the REIT Code? Can waivers be obtained?

Q13:

Under what circumstances is a management company allowed to contract out functions to third parties?

Q14:

How long does the REIT authorization process take?

Q15:

Since an authorized REIT has to be listed, are there any other rules that a REIT should observe to facilitate its listing?

Q16:

Once a REIT is authorized by the SFC, is it required to comply with any ongoing requirements?

Q17:

Is the management company of a REIT allowed to own units of the REIT it manages?

Q18:

Is there any minimum percentage of interest that an SFC-authorised REIT has to maintain in each of the properties that it invests in?

Q19:

Is there any allowance for investment in properties that the REIT does not have “majority ownership and control”?

Q20:

What are the disclosure requirements in respect of such properties that are not 100% owned by a REIT?

Q21:

Will an application lapse after a certain period of time? If so, how long? What should I do if my application has lapsed?

Q22:

What are the disclosure requirements in respect of the composition of distribution made by a REIT?

Q23:

Is the payment of road show expenses in relation to the listing of a REIT allowed to be made out of a REIT’s assets?

Q24:

7.6 of the REIT Code requires the preparation of an accountants’ report in respect of the special purpose vehicles (SPVs) through which a REIT will acquire real estate. To the extent that any of such SPVs owns assets and liabilities (the Business) and/or companies (including subsidiaries and associates) (the Companies) that will not be acquired by the REIT, how should the profit and loss and the assets and liabilities of such SPVs be dealt with in the accountants’ report for the purpose of complying with 7.6 of the REIT Code?

Q25:

Under what circumstances can convertible instruments (such as securities convertible or exchangeable into units or any options or warrants or similar rights for the subscription or issue of units) be issued by a REIT pursuant to the 20% general mandate permitted under 12.2 of the REIT Code? How would 12.2 of the REIT Code be applied in relation to an issue of convertible securities or an agreement to issue units where the units may be issued at a date later than the financial year in which the convertible securities or agreement are/is granted?

Q26:

6.2 of the REIT Code provides, among other things, that the Principal Valuer shall value all the real estate under the scheme for the purposes of issuance of new units. Is this rule applicable to the issuance of new units pursuant to (a) payment of management fees to the REIT manager in units; (b) grant of options in relation to the units of a scheme; and (c) dividend reinvestment?

Q27:

What are the content requirements in respect of interim/annual reports and results announcements of an SFC-authorised REIT?

Q28:

Do interim/annual reports or results announcements of an SFC-authorised REIT need to be vetted by the SFC prior to their publications?

Q29:

Does an SFC-authorised REIT need to hold annual general meetings (AGMs)?

Q30:

Under the Listing Rules, “top-up placings” conducted by listed companies are, subject to certain conditions being fulfilled, exempted from the reporting, announcement and independent shareholders’ approval requirements applicable to connected transactions. Is there a similar exemption for “top-up placing’s” conducted by REITs?

Q31:

Under the Listing Rules, issuance of new securities to connected persons of a listed company in certain other circumstances is also exempted from the reporting, announcement and independent shareholders’ approval requirements applicable to connected transactions. Is there a similar exemption for issuance of units by REITs in such circumstances?

Q32:

What are the major regulatory requirements Managers should note in respect of secondary offerings?

Q33:

Where a REIT is to acquire new properties, whether a valuation report on the existing properties held by the REIT has to be produced and be included in the relevant circular?

Q34:

Paragraph B31 of Appendix B to the REIT Code provides that the offering document shall be accompanied by, among other things, the scheme’s most recent audited accounts. What specific detail concerning financial information does the SFC expect these audited accounts to disclose? Does the SFC expect these audited accounts to be presented in any specific format?

Q35:

Can a REIT repurchase its own units?

Q35A:

Paragraph 6 of the repurchase circular dated 31 January 2008 issued by the SFC provides that any REIT proposing to repurchase its units shall also comply with the other restrictions and notification requirements applicable to listed companies purchasing their own shares on a stock exchange under Rule 10.06 of the Listing Rules (“Rule 10.06”), with necessary changes being made, as if the provisions therein were applicable to REITs. Is the restriction on subsequent issue of new shares within 30 days after a purchase under Rule 10.06(3) applicable to an issue of new units to the REIT manager as payment of management fees?

Q36:

Can a REIT adopt an incentive plan similar to a share option scheme or employees’ share award scheme commonly adopted by listed companies to incentivise and/or reward the employees of the Manager? What are the relevant requirements for adopting such plan?

Q37:

What should a REIT manager do if the aggregate borrowings of the REIT have exceeded the 45% limit imposed under 7.9 of the REIT Code as a result of a decline in property values due to any revaluation exercise?

Q38:

Under the Listing Rules, the acquisition or realisation of consumer goods or consumer services by a listed issuer from or to a connected person is exempted from the reporting, announcement and independent shareholders’ approval requirements applicable to connected transactions under certain circumstances. Is there a similar exemption for REITs?