An overview of regulations that protect real estate stocks, reits and derivative investors in Hong Kong

• Author: Rita Yi Man Li - Yi Lut Li
• Position: Department of Economics and Finance, Hong Kong Shue Yan University, Hong Kong - School of Law, City University of Hong Kong, Hong Kong
• Pages: 200-211

200 Lex ET Scientia. Economics Series

LESIJ NR. XVIII, VOL. 2/2011

AN OVERVIEW OF REGULATIONS THAT PROTECT REAL ESTATE

STOCKS, REITS AND DERIVATIVE INVESTORS IN HONG KONG

Rita Yi Man LI*

Yi Lut LI*

Abstract

All investors seek to make money. The repeated financial crises in recent years not only

caused many people to lose their money; it also reminds us of the importance of financial

regulations to reduce investors’ losses due to improper business activities in a company or stock

market. Together with London and New York, Hong Kong is one of the best known financial

markets in the world. Real estate investment does not rest on direct investments in hotels,

residential units, or the stock market. In this decade, Real Estate Investment Trusts (REITs) and

derivatives provide a new source of investment. Yet, the huge volume of transactions coupled with

increasingly complicated investment tools also implies that the rules of the legal system affect

many people. While many European countries and China follow civil law systems, Hong Kong

follows a common law system. Judge-made law forms one of the major sources of law and lays

down the important rules on indirect real estate investment. The code of practice and legislation

also provide a framework for investors and entrepreneurs.

Keywords: Real Estate Derivatives, Real Estate Stock, REITs, Hong Kong

1. Introduction

An increasing number of new financial tools are being developed to enable investors to make

money. Gone are the days when the stock market was the only source of indirect real estate investment.

Options, swaps, accumulators and Real Estate Investment Trusts (REITs) provide alternative ways to

hedge losses in the stock market or act a s alternative investment tools. Due to the s maller transaction

costs, the existence of a public market place in the securitized market, higher liquidity, greater number

of market participants, the indirect real estate market is generally more efficient than the direct one

(Oikarinen et al. 2011). The quality of financial infrastructure relies on an effective legal framework

(Herring and Chatusripitak 2000), Hong Kong’s success as one of the highest rank financial centers also

relies on this (MacNeil and Lau 2001). History also shows that appropriate legal regulations plays an

important role in financial market, for example, overregulation and unfavourable tax treatment once

resulted in a sluggish start of REITs in the U.S (Ulrich Schacht and Jens Wimschulte 2008). While

previous pool of literature sheds light on causes of subprime financial crisis, few or no research paper

has studied the regulations which protect indirect real estate investors. This study reviews Hong Kong’s

indirect real estate market statistics during financial crisis. It was found that Hong Kong REITs market’s

drop in prices was lowest among Australia, Japan, United Kingdom, United States, Singapore and

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*Department of Economics and Finance, Hong Kong Shue Yan University, Hong Kong,

ritarec1@yahoo.com.hk (corresponding contact)

* School of Law, City University of Hong Kong, Hong Kong