Member Article

Prior to 4 November 2004, a Hong Kong authorised scheme could invest up to 10% of its total net asset value in other collective investment schemes (CIS) under the Code on Unit Trusts and Mutual Funds (Code), but it could not invest in any type of real estate or interests in real estate (except shares in real estate companies). However, the SFC announced recently that starting from 4 November 2004, fund management companies may invest up to 10% of their portfolios in SFC authorised real estate investment trusts (REITs), with an aim of providing market participants with more flexibility. It is widely believed that the timing of SFC’s decision to allow investment in REITs is to coincide with the forthcoming REIT offering planned by the Hong Kong Housing Authority. Whilst the SFC’s efforts to enhance flexibility generally are welcomed, in this case their actions may have misfired as there is a concern that the move may limit investment in other forms of closed end investment funds (such as investment trusts or US listed REITs) to 10% of the total net asset value of a fund. Although the SFO expanded the definition of collective investment schemes to include closed end investment funds, the definition in the Code (which refers to unit trusts and mutual funds) has not yet been changed. In practice, the 10% investment CIS threshold was not applied to closed end investment funds or listed REITs: the previous market interpretation meant that listed closed end funds (including REITs) were simply treated as listed securities and subject to the same investment restrictions as other listed stocks. In fact, some authorised funds invest entirely in US listed REITs.