The listing last month of the first real-estate investment trust consisting solely of mainland Chinese properties was a ground-breaking step, not only in the development of Hong Kong’s nascent reit market but also in a regulatory sense.
The innovative legal structuring of Guangzhou Investment Company’s GZI Reit has created a template for investors to tap the value in commercial property in China, while enjoying the benefit of the liquidity associated with investing in a listed vehicle.
Moves in Beijing to clamp down on property-related lending, in an attempt to cool the sector, have fuelled interest by developers in finding new ways to raise capital from their real-estate assets on the mainland. With GZI Reit as the benchmark, several similar deals are now set for the coming months.
The inaugural transaction involved packaging four prime shopping and office buildings owned by Guangzhou Investment, a Guangzhou municipal government arm, into a reit for listing. GZI Reit Asset Management Limited, the trust manager, set up a Hong Kong holding company to acquire the properties held through British Virgin Islands special-purpose vehicles, and devised an asset-holding structure suitable for listing via an initial public offering in Hong Kong. The listing vehicle raised US$230m in the IPO. Such a first-to-market deal had to clear regulatory hurdles. The Hong Kong Securities and Futures Commission (SFC) had revised its rules a few months earlier to let locally listed reits invest in overseas properties.
In line with the watchdog’s commitment to protecting investors, lengthy and complex negotiations were necessary to minimise risks from uncertainties over issues such as Chinese tax, foreign exchange and land title.
All aspects of the transaction had to comply with both Chinese and Hong Kong law, and the legal solutions set the tone for how future deals could secure government support in both jurisdictions.
The structure involved special approvals from China’s State Administration of Foreign Exchange for remitting funds to foreign property holding companies. The regulator allowed each of the four buildings in the reit to convert their renminbi-denominated rental income into foreign currency, so that rent could be repatriated offshore in Hong Kong dollars without delay, as the SFC required.
Because each property in the reit was owned offshore, an onshore Chinese company had to be appointed to collect and remit rent and to operate and manage the buildings.
The various approvals granted for GZI Reit will have far-reaching implications. Chinese property developers and foreign investors can now realise far greater value from a big growth sector.
The writer is a partner at Paul, Hastings, Janofsky & Walker in Hong Kong: firstname.lastname@example.org