Hong Kong may finally have a dedicated hotel REIT by the end of this month as Regal has another attempt to list its properties, having pulled its initial float back in November.
While the difficulties in listing have much to do with local market issues around REITs, it highlights some of the challenges ahead for corporates looking to shed their real estate via a REIT vehicle.
The five hotels being injected into the vehicle will have a combined value of HK12.5bn ($1.6bn). But unlike with European REIT vehicles, the operating and property development company left after the spin-off, is set to retain an interest of about 72% in the new REIT.
The executive director of the REIT will be Kai Ringenson, a longstanding hotel executive who has had positions with Securum, Pandox and Conran prior to joining Regal Hotels International.
From where the new REITs of Europe will source their property was an issued raised in the conference programme at the MIPIM property event in Cannes.
Most new REITs will find property sources from existing portfolios held by private equity or entrepreneurs, said Edmund Craston, managing director and European head of real estate investment banking at Lehman Brothers.
Another source might be closed-end funds, which Craston expects to see convert to REIT status. And the final, third main source was potentially owner-occupied real estate. “Increasingly corporates are recognising that it is not a good use of equity to hold real estate and they also fear that private equity might buy them and strip out the real estate,” said Craston.
Corporately held real estate was less likely to be converted directly into REITs, however, he added. The problem was that it was not easy to create a REIT that had only one tenant.
“It is more likely that owner-occupied property would be sold to existing REITs,” said Craston. John Gellatly, director at BlackRock, said that institutions had exposure to real estate already thanks to property unit trusts.
Although this is one factor that might limit the pace of REIT growth, institutions in Europe were increasing their exposure to property. “There is a lot of money headed our way,” said Gellatly.
The advent of REITs also means that there will be an increasing sector focus. “We will see a fundamental change in the business model but not just at the minute. It will happen when the shake-out comes,” said Gellatly.
Nick Kurtis, group head of equity at Macquarie Goodman, said that a major drive of the creation of REITs in Australia was the lack of liquidity. “This is clearly not a problem now,” said Kurtis.