Colleague A likes investing in properties, and our conversations often centre around this topic. Recently, we talked about a property investment which appears to be a collective investment scheme (CIS).
Colleague A: It is common to buy a residential, commercial or industrial unit, but not a unit of student dormitories. This type of property investment looks interesting.
Mr. Chin: Apart from student dormitories, I have also seen property investments involving hotels, shopping malls, resorts and nurse dormitories in recent years. However, these property investments may constitute as CISs under the Securities and Futures Ordinance.
Colleague A: What is a CIS?
Mr. Chin: Simply put, a CIS typically involves the pooling of funds from various investors to invest in assets which are managed as a whole by an operator of the arrangement. Popular investment products such as investment funds, MPFs and real estate investment trusts (REITs) are all CISs.
Understanding the elements of a CIS
Colleague A: I see. But property purchases and sales seem unrelated to CIS!
Mr. Chin: Whether the sale of any type of real estate or a real estate project amounts to a CIS depends on many factors, including how the property is managed. If investors do not have day-to-day control over the purchased units, these property investments may be CISs.
Colleague A: Can you tell me more?
Mr. Chin: Typically if a property investment is a CIS, all of the property units will be managed as a whole by a management company which will have control over the units’ day-to-day management, with the aim to bring investors returns. This may involve “buy-to-let” or “buy and leaseback” features to facilitate centralized leasing. Investors will have no control over key profit-generating decisions, such as choice of tenants, term of lease, amount of rent, etc.
Colleague A: If a property investment is a CIS, how will its sales be regulated in Hong Kong?
Mr. Chin: Under existing regulations, only CISs authorised by the SFC can be offered to the Hong Kong public. In general, CISs not authorised by the SFC can only be sold to professional investors. A note of caution on unauthorised investment arrangements: As such arrangements and their offering documents are not authorised by the SFC, the schemes may not be suitable for the Hong Kong public and the product disclosures may not be clear and complete, retail investors participating in these schemes may not be properly protected.
Investors interested in real estate related CISs may consider REITs listed in Hong Kong as an option.
