MPF: more flexibility in REIT investments

Hong Kong’s Mandatory Provident Fund Schemes Authority (MPFA) has recently issued two sets of revised guidelines: III.2 Guidelines on Equities and Other Securities (Guideline III.2) and III.14 Guidelines on Default Investment Strategy (Guideline III.14). The revisions enable greater flexibility in investment in real estate investment funds (REITs).

The revised Guideline III.2 enhances the ability of an MPF constituent fund and an approved pooled investment fund (MPF product) to invest in REITS as follows:

 (1) 

subject to the MPFA’s approval, up to 100% of the funds of an MPF Product may be invested in (a) REITs that are authorised by the Securities and Futures Commission (SFC) under the Code on Real Estate Investment Trusts and listed on the Stock Exchange of Hong Kong (HREITS) and (b) REITs listed on an approved stock exchange in Australia, UK and USA ((a) and (b) collectively Category A REITS) provided that investment in each of such Category A REIT does not exceed 10% of its funds; and

 (2) 

up to 10% of the funds of an MPF Product may be invested in REITs that are listed in Canada, France, Japan, Singapore or the Netherlands (collectively Category B REITS). The aforesaid 10% limit is an aggregate limit together with other permissible investments under section 8(2)(b) of Schedule 1 to the MPF (General) Regulation (Regulation).



Previously, HREITS were permissible investments under section 8(2)(c) of Schedule 1 to the Regulation and REITs listed on an approved stock exchange in Australia, UK and USA were permissible investments under section 8(2)(b) of Schedule 1 to the Regulation, and investment in the Category A REITS together with other permissible investments under section 8(2) of Schedule 1 to the Regulation could not exceed 10% of the funds of an MPF Product. Under the revised Guideline III.2, the Category A REITS are now approved as permissible investments under section 8(1)(c) of Schedule 1 to the Regulation. Guideline III.2 further provides that a stapled REIT would be permissible if it staples together two or more securities, each of which itself is permissible under Schedule 1 to the Regulation.

The Category B REITS are a new type of permissible investments approved under section 8(2)(b) of Schedule 1 to the Regulation.

There are consequential amendments to the meaning of “higher risk assets” described in Guideline III.14 relating to the default investment strategy – all REITS that are permissible under the Regulation would remain as “higher risk assets” for the purpose of default investment strategy funds.

REITs are often perceived as a suitable investment choice for retirement funds as they tend to offer steady investment yield. The changes brought about by the revised Guidelines will greatly enhance the flexibility in MPF portfolio design using REITs as one of the building blocks. In addition, the new Category B REITS will enhance geographical diversification. We believe the above changes will be welcomed by MPF managers and will contribute to the long-term development of MPF products.