Deloitte and HKREITA Report Maps Path for Hong Kong REIT Market Growth

• Flexible regulatory and tax framework crucial for Hong Kong real estate investment trust (REIT) market expansion
• Introduction of corporate REIT structures, flexible development and property holding rules, tax transparency treatment and lower stamp duty for REIT property transfers identified as key measures to enhance city's appeal
• Upcoming Stock Connect inclusion and government support measures poised to strengthen market accessibility and boost investor participation

Deloitte China and the Hong Kong REITS Association Limited (HKREITA) today jointly release Unlocking Future Growth through Reform: A Vision for Hong Kong REIT Market, a market research report drawing on insights from REIT industry leaders and comparative analysis of major REIT jurisdictions to examine how regulatory enhancements, tax optimisation and market development measures can strengthen Hong Kong's REIT ecosystem.

Globally, REITs stand as an attractive investment vehicle, offering sponsors and investors opportunities for portfolio diversification and stable income streams. With the city’s robust financial infrastructure and strategic position as a gateway for cross-border investment flows with the Chinese mainland, Hong Kong has significant potential to develop into a thriving REIT hub in Asia.

Philip Law, Deloitte China Real Estate Industry Leader, says, “After initial growth following the first REIT listings since the mid-2000s, Hong Kong's REIT market has plateaued at 11 listings, indicating substantial room for expansion in both scale and sector diversity. Leveraging insights from industry leaders and Deloitte's global expertise, our research examines how regulatory and tax frameworks can be enhanced to unlock the full potential of Hong Kong's REIT sector. Hong Kong's unique position as a gateway between East and West, particularly its role in facilitating investment flows with the Chinese mainland, creates promising opportunities for REIT market growth. Combined with Hong Kong's strength as Asia's leading financial hub, these developments point to positive prospects for REIT market growth and diversification."

Development of H-REIT Regulations

Unlike major markets such as the US and Japan that accommodate multiple legal forms, H-REITs operate under a unit trust structure that leads to capital raising challenges. Although they can use debt or equity for funding, equity issuance approval and leverage limits especially restrict smaller REITs' growth. H-REITs are also required by the REIT Code to retain properties for at least two years, impacting divestment timing based on investment strategy.

George Hongchoy, Honorary Founding President & Chairman of HKREITA, Executive Director & Group Chief Executive Officer of Link Asset Management Limited, says, “To address current structural limitations and attract more market entrants, we advocate for the introduction of corporate structures for H-REITs that maintain asset protection through independent custodians. This flexibility would enable participation from institutional investors who may face restrictions on trust investments. Meanwhile, relaxing the two-year property holding rule would allow H-REITs to respond quickly to market changes and optimise portfolio management without sacrificing long-term stability.”

H-REITs have a borrowing ceiling of 50% of gross asset value (GAV) compared to Japan, Australia, the US and the UK, where borrowing is essentially unlimited but subject to various financial restrictions or tax implications. Additionally, H-REITs can only engage in property development activities up to 10% of their GAV (with a possible increase to 25% with unitholder consent). These limitations may hinder H-REITs’ ability to leverage debt to enhance investor returns, and reduce the competitiveness of H-REITs in fast-moving markets.

Kevin Leung, Director of HKREITA, Executive Director & Chief Executive Officer of Spring Asset Management Limited, says, “Increasing the flexibility of borrowing threshold is essential for unleashing H-REITs’ growth potential. This adjustment would allow REIT managers to set appropriate gearing levels based on market conditions and lender requirements, while incorporating risk management measures. We also propose raising the property development cap to 25% without unitholder approval, enabling H-REITs to pursue development opportunities more effectively.”

Tax Considerations for H-REIT

Unlike markets with tax transparency treatment where income is taxed only at the unitholder level, Hong Kong imposes taxes at the REIT level. This structure, with property tax of 15% on direct holdings or profits tax of 16.5% on special purpose vehicle (SPV) rental income regardless of unitholders' tax positions, impacts both investor returns and sponsor interest. Additionally, the stamp duty on REIT property transfers in Hong Kong reaches up to 4.25%, which could exceed a REIT's annual income and deter property owners from transferring assets to REIT structures.

Hubert Chak, Honorary Founding President of HKREITA, Executive Director & Chief Executive Officer of SF REIT Asset Management Limited, says, “Companies face significant upfront costs for asset restructuring through stamp duty payments, even before knowing whether the REIT listing will succeed, which creates a major barrier to entry. We suggest that stamp duty collection could be deferred until after successful listing, rather than requiring significant upfront payment regardless of listing outcome. This, in turn, would create an attractive economic incentive for new REIT launches.”

Other suggestions include lowering stamp duty for property injections into H-REITs, which could involve exempting H-REITs from stamp duty or reducing the rate to 0.2% for direct property transfers, aligning with the rate for transactions through SPVs.

Strengthening Hong Kong as a Premier REIT Destination

Despite the regulatory and tax considerations, industry experts are upbeat about the prospects of Hong Kong’s REIT market, thanks to strong government support from both local and mainland authorities. The introduction of new policies, such as the inclusion of REITs in the Stock Connect programme, is expected to significantly boost liquidity and trading activity, similar to the surge seen in ETFs after their addition to the scheme.

Deliang Lin, Honorary Founding President of HKREITA, Chairman, Executive Director & Chief Executive Officer of Yuexiu REIT Asset Management Limited, says, “Expanding dual counter trading to H-REITs would enhance RMB market development by offering investors trading flexibility in both currencies. This would improve market liquidity and reduce counter price gaps. With Stock Connect inclusion, RMB-denominated H-REIT units would attract mainland investors via Southbound trading. We should also streamline the REIT listing process and explore dual listing framework with mainland exchanges.”

In addition, the report recommends enhancing Hong Kong’s REIT market by diversifying asset types, improving investor education and fostering a collaborative community. Specifically, REITs could potentially expand into sectors such as healthcare and data centres, capitalising on Hong Kong’s existing strengths. To deepen investor knowledge, the report calls for stronger educational initiatives through partnerships and media engagement. Through these strategic reforms and collective industry efforts, Hong Kong is well-positioned to strengthen its role as a leading international REIT hub.

Read the full report here.

High resolution pictures can be downloaded here.

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About Hong Kong REITS Association (HKREITA)

HKREITA is a collaborative platform of the city's real estate investment trusts (REITs) sector. The association brings together REIT managers, industry practitioners and professionals working in the REIT sector who share the association’s vision to jointly promote the overall development of the REIT market in Hong Kong. HKREITA seeks to pool ideas and to serve as the representative voice of the REIT sector in Hong Kong, and works closely with policymakers and other stakeholders to boost Hong Kong's position in the global REIT market.

For details, please visit hkreita.com

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