MAS seeks safeguards for Reit holders

By Kalpana Rashiwala - Mar 24, 2007
The Business Times

(SINGAPORE) In another move to make Singapore a major hub for Real Estate Investment Trusts (Reits), the Monetary Authority of Singapore yesterday issued a consultation paper on Reits, barely 18 months after it last made revised guidelines on them.

Among other things, the proposed changes seek to put in place measures to safeguard the interests of unit holders. These include:

* enhancing disclosure on financial engineering or short-term yield-enhancing arrangements by Reit issuers and the risks associated with them;
* abolishing discounts to institutional investors at initial public offers;
* and banning 'poison pill' arrangements by Reit managers at IPO to entrench their positions, such as long-term management contracts and high termination fees.

The proposed changes also seek to:

* make investment guidelines for Reits clearer and more flexible;
* rationalise guidelines where compliance costs exceed benefits;
* and introduce a licensing framework for Reit managers under the Securities and Futures Act.

Market watchers say the proposed changes should promote the continued development of Singapore's Reit industry, which has grown to 15 Reits with a combined market capitalisation of more than $25 billion since the first Reit was floated just five years ago. Also among the proposals is a requirement that Reits invest at least 75 per cent of their assets in income-producing real estate. At present, they are required to invest 35 per cent in real estate and at least 70 per cent in real estate and real estate-related assets, such as shares of property companies.

MAS also proposes to remove the 5 per cent single-party limit for investments in real estate-related securities, but retain it for non-real estate-related securities, as Reits should not have concentrated investments in such assets.

CapitaMall Trust Management Ltd CEO Pua Seck Guan said the changes will 'create more avenues for investments by Reits, but they could alter the risk profile of some Reits'.

Another proposal is to allow Reits to pay dividends in excess of current income, subject to conditions.

MAS proposes to streamline several compliance requirements, many of which relate to valuations. It wants to do away with the requirement for an independent expert's opinion on a proposed interested party transaction when the value is equal to or greater than 5 per cent of a Reit's net asset value.

A Reit analyst said: 'The package of changes should make things more cost efficient. As it is, Singapore is already in a good position in the Reits market. It's a question of keeping an edge on others.'

Industry observers are not surprised by most of the measures proposed by MAS to protect unit holders - such as wider disclosure and banning poison pills - because these were highlighted a while ago. 'It's just a formalisation,' a market watcher said.

The consultation paper says: 'MAS is concerned that the costs of such short-term yield-enhancing arrangements and their negative impact on long-term returns may not be adequately disclosed or understood by investors.'

MAS wants market feedback on its consultation paper by April 23.

However, the paper is silent on a subject many Reit industry players and market watchers have been waiting for - a takeover code for Reits, which could facilitate consolidation in the local market by allowing more efficient players to take over less efficient ones.

MAS said last week that the Securities Industry Council (SIC), which administers the takeover code, is studying whether the code should apply to Reits and whether specific provisions should be tailored for them.

The Reit analyst said: 'MAS' latest proposal to ban Reit managers from including long-term management contracts and high termination fees during IPO could well be a precursor to a takeover code for Reits. By disallowing arrangements by Reit managers to entrench themselves, it will make it easier to do a takeover.

'As our Reit market grows in size, it will reach a stage where it will be good for the more efficient Reit players to have a chance to take over the less efficient players.'

Agreeing, CMTML's Mr Pua said: 'Certain Reits will underperform and a takeover provides unit holders an avenue for exit and for value to be delivered.'

However, he is concerned about the proposed ban on discounts to institutional investors at IPO. MAS argues that 'such differential pricing would disadvantage retail investors'. But Mr Pua believes such a move would 'reduce pricing power and flexibility of a Reit issuer to ensure the success of the deal'.

Another experienced Reit player said: 'Discounts are usually given to cornerstone investors. Sometimes you need them to establish the validity of pricing and yield for an issue. In other cases, you may have vendors selling assets to the Reit on the basis that they will be given IPO units at a discounted price.

'Of course, the issuer can get round the proposed rules by doing a pre-IPO placement to cornerstone investors.'

» MAS' consultation paper