Real Estate Investment Trusts (REITs) in Hong Kong: A Legal and Regulatory Guide

Introduction

Real Estate Investment Trusts (REITs) are a globally recognised investment vehicle that allows investors to gain exposure to income-producing real estate through a listed, liquid security. Hong Kong is one of Asia's leading REIT markets, with a well-established regulatory framework administered by the Securities and Futures Commission (SFC) and a listing platform provided by the Hong Kong Stock Exchange (HKEX).

This guide provides an overview of the Hong Kong REIT market, the regulatory framework, key structural features, and the legal considerations relevant to sponsors, REIT managers, trustees, and investors.

The Hong Kong REIT Market

Hong Kong's REIT market has grown significantly since the listing of the first Hong Kong REIT, The Link REIT (now known as Link Real Estate Investment Trust), in 2005. The market now encompasses a range of REITs investing in diverse asset classes including retail malls, office buildings, logistics properties, hotels, and healthcare facilities.

Hong Kong-listed REITs have historically attracted a mix of institutional and retail investors seeking stable dividend income and indirect exposure to quality commercial real estate. Many Hong Kong REITs hold properties not only in Hong Kong but also in Mainland China, Singapore, Japan, Australia, and other Asia-Pacific markets.

The Regulatory Framework

The SFC's Code on Real Estate Investment Trusts

The primary regulatory framework for Hong Kong REITs is the SFC's Code on Real Estate Investment Trusts (REIT Code), which sets out the requirements for the authorisation, management, and ongoing operation of REITs. The REIT Code was first published in 2003 and has been revised several times to reflect market developments and regulatory best practices.

Key requirements under the REIT Code include:

• Investment mandate: At least 75% of a REIT's gross asset value (GAV) must be invested in income-producing real estate. This threshold was reduced from 90% in 2020 to provide greater flexibility for REITs to invest in development properties and non-real estate assets
• Distribution requirement: REITs must distribute at least 90% of their audited annual net income after tax to unitholders
• Borrowing limit: The total borrowings and other debt securities of a REIT may not exceed 50% of GAV
• Single asset concentration: No single property may represent more than a prescribed percentage of a REIT's GAV (subject to certain exceptions for REITs with a limited number of properties)
• Development and vacant properties: REITs may invest up to 10% of their GAV in property under development or vacant land
• Related party transactions: Transactions between the REIT and related parties of the REIT manager are subject to disclosure requirements and, in certain cases, unitholder approval

HKEX Listing Requirements

In addition to the REIT Code, a REIT listed on the HKEX must comply with the Exchange's Listing Rules, which set out requirements for the initial listing, ongoing disclosure, and governance of listed REITs.

For a new REIT listing, the key requirements include:

• A minimum initial public offering size and public float
• A track record of income-producing real estate and a minimum market capitalisation
• The appointment of a licensed REIT manager and a trustee approved by the SFC
• Preparation of a listing prospectus complying with the Companies (Winding Up and Miscellaneous Provisions) Ordinance and applicable SFC guidance

REIT Structure

A Hong Kong REIT is structured as a unit trust, with three key parties:

The Trustee

The trustee holds legal title to the REIT's assets on trust for the unitholders. The trustee is responsible for safeguarding the assets and ensuring that the REIT is managed in accordance with its trust deed and the REIT Code. The trustee must be an approved trustee and must be independent of the REIT manager. In practice, trustees are typically major banks or trust companies.

The REIT Manager

The REIT manager is responsible for the day-to-day management of the REIT's assets, including making investment decisions, managing the property portfolio, raising finance, and distributing income to unitholders. The REIT manager must hold an SFC Type 9 (asset management) licence and must comply with the governance and conflicts of interest requirements of the REIT Code.

The Unitholders

Unitholders are the beneficial owners of the REIT's assets, through their units in the trust. Units are listed and traded on the HKEX, providing daily liquidity. Unitholders have rights under the trust deed to attend and vote at general meetings, to receive distributions, and in certain circumstances (e.g., removal of the REIT manager) to exercise collective action rights.

Key Investment and Operational Features

Distributions

One of the primary attractions of REITs for investors is the requirement to distribute at least 90% of net income. Distributions are typically paid semi-annually or quarterly. The distribution per unit (DPU) is a key metric by which investors evaluate REIT performance.

Leverage and Financing

REITs use debt financing to enhance returns and fund acquisitions. The 50% GAV borrowing limit provides a ceiling, but most well-managed REITs operate at lower leverage levels to maintain financial flexibility. REIT managers must carefully manage interest rate risk, refinancing risk, and the availability of credit facilities.

Asset Acquisition and Disposal

REIT managers regularly evaluate opportunities to grow the portfolio through acquisitions and to optimise the portfolio through disposals of non-core or underperforming properties. Significant acquisitions may require the approval of the REIT's unitholders (particularly where they involve related parties or exceed prescribed size thresholds).

Development Properties

Following the 2020 amendments to the REIT Code, REITs may now invest a greater proportion of their GAV in property under development. This change was intended to enable REITs to participate in asset enhancement initiatives and new development projects, particularly on the Mainland.

Governance and Investor Protections

The REIT Code contains extensive governance requirements designed to protect unitholder interests, including:

• Independent directors: At least one-third of the board of the REIT manager must be independent non-executive directors
• Audit committee and remuneration committee: The REIT manager must establish these committees with appropriate independent membership
• Related party transaction controls: Transactions between the REIT and related parties of the REIT manager require disclosure and, in certain cases, independent valuation and unitholder approval
• Connected person transactions: The HKEX Listing Rules impose additional controls on connected person transactions, requiring prior unitholder approval for significant connected transactions
• Unitholder meetings: Unitholders may requisition extraordinary general meetings and propose resolutions on specified matters

Tax Treatment of Hong Kong REITs

Hong Kong does not impose a specific REIT tax regime, and REITs are generally subject to the same tax rules as other Hong Kong unit trusts. Key tax considerations include:

• Rental income from Hong Kong properties held by the REIT is subject to property tax at 15% of the net assessable value, subject to deductions for rates and repairs
• The REIT itself is generally not subject to profits tax on rental income from Hong Kong properties, as rental income is typically taxed at the property level
• Distributions received by unitholders from a Hong Kong REIT are generally not subject to withholding tax; however, the tax treatment of distributions in the hands of the investor will depend on the investor's own tax position and jurisdiction of residence
• For REITs holding properties in Mainland China, the tax treatment of rental income, dividends, and disposal proceeds at the PRC level is a key consideration

The Future of the Hong Kong REIT Market

The Hong Kong REIT market continues to evolve. Recent regulatory amendments have expanded the asset classes available to REITs and increased flexibility for development investment. Ongoing discussions around the introduction of a REIT tax incentive regime — similar to those available in Singapore and Japan — could further enhance the attractiveness of Hong Kong as a REIT domicile.

The market has also seen growing interest from Mainland China sponsors looking to use Hong Kong's REIT platform as a vehicle for listing Mainland commercial real estate assets, leveraging Hong Kong's deep capital markets and international investor base.

How Alan Wong LLP Can Help

Alan Wong LLP advises sponsors, REIT managers, trustees, and investors on all aspects of Hong Kong REIT transactions and regulatory compliance. Our services include:

• Advising on the structuring and establishment of new REITs, including the preparation of trust deeds and management agreements
• Advising REIT managers on compliance with the REIT Code and HKEX Listing Rules
• Acting on REIT acquisitions and disposals, including the preparation and negotiation of sale and purchase agreements and property due diligence
• Advising on related party transactions and unitholder meeting procedures
• Advising investors on their rights and entitlements under REIT trust deeds and Hong Kong law

Conclusion

Hong Kong's REIT market offers a sophisticated, well-regulated platform for real estate investment, backed by a transparent legal framework and an active, liquid exchange. For sponsors and managers, Hong Kong REITs provide access to deep capital markets and a broad international investor base. For investors, they offer liquid exposure to quality income-producing real estate with strong governance protections. Legal expertise is essential to navigate the regulatory requirements and transaction complexities of this specialised market.

This article is for general information purposes only and does not constitute legal advice. For advice on specific REIT matters, please contact Alan Wong LLP.