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Following is a question by the Hon Albert Cheng and an oral reply by the Secretary for Housing, Planning and Lands, Mr Michael Suen, in the Legislative Council today (March 8):
Question:
UBS AG was one of the Joint Global Coordinators during the listing of The Link Real Estate Investment Trust ("The Link REIT") last year, and participated in determining the offer price for units of The Link REIT, which was set at $10.30. However, in a research report published some months ago, UBS AG pointed out that the assets of The Link REIT were undervalued, and set the target price of The LINK REIT for the coming 12 months at $20.28 per unit, which is nearly two times of the initial offer price. Some members of the public therefore query if public assets have been disposed of at a knock-down price, and whether the retail and carparking facilities under The Link REIT will be divested by the investors concerned. Concerning the listing arrangements for The Link REIT, will the Government inform this Council:
(a) whether it knows how USB AG arrived at the forecast that the unit price of The Link REIT would nearly double the initial price 15 months after its listing; whether it has assessed if there was any professional negligence on the part of the Joint Global Coordinators in determining the offer price for units of The Link REIT;
(b) given that an investor will be required to disclose his interest only when he holds an interest in 5% or more of all the units of The Link REIT, whether it knows the list of investors who hold a relatively significant number of units and who together hold an interest in half or more of all the units of the trust; and
(c) given that the facilities under The Link REIT and the livelihood of hundreds of thousands of public housing tenants are closely bound, whether any measures are in place to prevent investors from divesting the assets of The Link REIT after gaining control of it, and whether such measures include buying back the units of The Link REIT in the market?
Reply:
Madam President,
My reply to the three-part question is as follows:
(a) After the public listing of The Link Real Estate Investment Trust (The Link REIT), research departments of quite a number of banks and securities firms have published research reports on The Link REIT together with forecasts of its target price. They include the four investment banks which assisted in the preparation of the listing of The Link REIT either as joint global co-ordinators or as financial adviser to the Housing Authority (HA), as well as some other banks which were members of the underwriting syndicate. Such publication of research reports is a common practice in the market. We understand that those research reports make considerably different forecasts on the target price of The Link REIT for the next twelve months, ranging from HK$13.3 per unit to $20.28. The variations exist because different institutions have adopted different assumptions in making their projections. We do not comment on individual research reports.
I must reiterate that the valuer commissioned by the HA to conduct the independent property valuation for the purpose of the listing of The Link REIT is reputable and highly experienced in the trade. In addition, the valuation methodology complies with the standards stipulated in the Code on Real Estate Investment Trusts promulgated by the Securities and Futures Commission (SFC), and is also in line with international practice for property valuation conducted for the listing of similar funds.
As regards the setting of the offer price of The Link REIT in the initial public offering, apart from considering the result of the property valuation, account must be taken of other factors including interest rate trends, projected dividend yields of The Link REIT, pricing and dividend yield benchmarks of similar funds in the Asia-Pacific markets, and market opinions on the business development potential of The Link REIT. In addition to the three joint global co-ordinators who gave a collective opinion on the pricing of The Link REIT, the financial advisor to the HA gave independent advice to safeguard the HA's interest. As a matter of fact, when The Link REIT was listed in November last year, the market generally considered that the offer price of The Link REIT was set at a reasonable level which reflected the market conditions at that time.
(b) In accordance with the requirements of the SFC, The Link REIT requires investors holding an interest of 5% or more of the units in issue of The Link REIT to disclose such interest to The Link REIT and the Stock Exchange of Hong Kong, which will then publish such information. We do not have a list of investors who hold a relatively significant number of units of The Link REIT or who hold an interest in such units.
(c) The Link REIT has become a private entity after its public listing. In a commercial society, it is not appropriate to totally ban the resale of properties by a private entity to a third party. No such prohibition is imposed on real estate investment trusts in other parts of the world. However, in designing the divestment vehicle, the HA has taken into account the availability of suitable mechanisms to restrict The Link REIT from arbitrarily selling its assets or changing their use.
First, the Code on Real Estate Investment Trusts of the SFC restricts The Link REIT from active trading of real estate. A majority of The Link REIT’s income must be derived from recurrent rentals of its properties.
Secondly, the Property Agreement between the HA and The Link REIT contains restrictive covenants applicable to the divested properties. Under those covenants each shopping mall or car-parking facility within a public housing estate can be sold by The Link REIT only as a whole and not in part. Such restrictive covenants will apply in the same way to any third party who purchases any such facilities from The Link REIT.
Thirdly, in the government leases (commonly known as "land leases") relating to the properties which The Link REIT acquired from the HA, there are stipulations on the land use of the lots concerned. Owing to such land-use restrictions, those properties must continue to be used for retail or car-parking purposes, which cannot be changed at will. To make a change to the land lease, the prior consent of the Government and of all the parties to the leases must be obtained. In other words, any change to the management or control of these properties would not affect the continued use of those properties for retail or car-parking purposes.
The Government and HA have repeatedly stated that they will not buy back from the market any units of The Link REIT.
Ends/Wednesday, March 8, 2006
Issued at HKT 15:25
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