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

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