Hong Kong: A Real Estate Fund of Funds? Part 1

Stephen Chung

Managing Director

Zeppelin Real Estate Analysis Limited

May 2006

In the USA and elsewhere, and in the arenas of equities or direct investments, it is not uncommon to have funds of funds, i.e. a fund which invests in other funds that are deemed promising or well established in investment performance. Hong Kong has, at the point of composing this article, 3 REIT (real estate investment trusts) with several more being reported in the pipeline. Thus, it is possible that someday there will be at least a dozen, if not dozens, of REIT based in Hong Kong and investing in real estate both within and outside of Hong Kong. As such, there may eventually be opportunities for setting up a (real estate investment) fund of real estate funds / REIT.    

Several questions may be popping up in the readers・ minds right now. First and foremost may be the question on why investors would want to invest in a fund of funds rather than investing directly in the funds that .the・ fund invests.  The second question may be a concern on the operating costs including the management fees as there is apparently a double layer of fees; one for the fund of funds, and ones for the various funds in which .the・ fund invests.  

True and these are genuine concerns. Nonetheless, the rationale for investing in a fund of funds may in part be very similar to those of investing in a fund (of any kind): 

1)      Going for higher returns assuming similar levels of risks = which the investor on his or her own would not have procured or found. This in turn implies the investor is going for the extraordinary investment skills and clout (or even luck to some) that the fund managers have or are deemed to possess. Despite the fund operating costs and management fees involved, it matters rationally little to an investor IF the fund could eventually produce a comparatively higher net return for the investor than he or she would have made on his or her own, or for that matter, that other funds of funds, or just funds, could produce.  In short, it eventually boils down to having excellent investment performance, and investors would be more forgiving of high costs and fees IF the returns are sufficient enough to more than cover for them. On the other hand, investors would NOT be forgiving EVEN IF a fund does NOT charge them for any costs or fees but loses money for them.  

[FOOD FOR THOUGHT = is there really an extra layer of fees for the fund of real estate funds / REIT? As an analogy, when an investor buys a fund that invests in equities, the equities fund will certainly charge for some form of management costs and fees, yet so do the publicly listed companies in which the equities fund invests, usually in the form of management board fees, senior executive salaries and bonuses, staff wages, and so on. As such, a REIT invests directly in the real estate portfolio it holds, and requires different aspects of management teams to ensure its proper operation. These management teams are the counterpart of the management board, top executives, and staff teams of say a publicly listed real estate company. Thus, a fund of real estate funds / REIT is similar to a fund that invests in equities, and the issue of double layer management fees may not be as astounding as it appears to be].  

2)      Investors lacking the time and skills required = to pick the winners among the real estate funds or REIT, or to select ones which suit one・s investment return and risk parameters. This also involves deciding when to acquire and when to dispose a certain fund holding and by how much. This may be more pronounced IF the fund invests in funds which are involved in out-of-town real estate, ranging from Mainland China to the USA / Europe / Emerging Economies etc. Statistically, NOT all real estate funds or REIT will do well, just like the equities market, i.e. not all listed companies provide a good return over time.  

[At the point of writing this article, of the 3 REIT that Hong Kong currently has, namely the LINK REIT, the GZI REIT, and the Prosperity REIT, only the LINK REIT has a share price (much) higher than the level when it was first listed. The other two have seen their share prices adjusted downward].  

3)      Capital to be invested too small and insufficient for participating in several real estate funds / REIT = and a fund of real estate funds / REIT would enable the investor to enjoy some form of diversification to minimize the risks involved. Having said so, the current 3 REIT are too small a number for meaningful diversification.


In summary, your humble author does NOT think now is the time to have a fund of real estate funds / REIT as there are only 3 to speak of. Yet, given time and assuming many more REIT to come, there could be a reason (and market demand) for a fund of real estate funds / REIT.

Notes: The article and/or content contained herein are for general reference only and are not meant to substitute for proper professional advice and/or due diligence. The author(s) and Zeppelin, including its staff, associates, consultants, executives and the like do not accept any responsibility or liability for losses, damages, claims and the like arising out of the use or reference to the content contained herein.

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