Proposed changes to Reit regime hailed

By Uma Shankari - Mar 24, 2007
The Business Times

MARKET players BT spoke to said that the changes to the regime governing real estate investment trusts (Reits) here - proposed by Singapore's central bank - are more to prevent problems in a maturing Reit market than an attempt to correct current bad practices.

The Monetary Authority of Singapore (MAS) yesterday released proposed 'enhancements' to the Reit regime here, seeking feed back on a wide variety of changes, including disallowing discounts for institutional investors during initial public offerings (IPOs), increasing the minimum investment on real estate, preventing Reit managers from entrenching themselves and revising rules on the use of 'financial engineering' to boost short-term returns.

One major concern MAS has is the use of 'financial engineering' by Reit managers to boost short-term returns. It wants to force Reits to disclose the use of deferred payment arrangements, and step up interest-rate swaps and dividend waivers to boost immediate returns for investors.

Market watchers said that this is in response to activity in the Hong Kong Reit market.

'There has been a lot of financial engineering with Reits in Hong Kong, much to the detriment of the market,' said Mark Ebbinghaus, the head of Asian real estate at investment bank UBS. With the Singapore Reit market maturing, tighter frameworks need to be in place, he said.

The MAS also said it will seek to prevent Reit managers from using long-term contracts and high termination fees to maintain tight control over the trusts. Entrenched Reit managers were seen as one of the 'poison pills' harming the market, as they could sometimes stay on even when underperforming.

Michael Smith, head of property investment banking in Asia at Goldman Sachs, welcomed the change, saying that it will make the market more effective. 'I would prefer that they (Reit managers) stayed more on their ability to perform than because of other things,' he said.

Market watchers also said that the removal of discounts for institutional investors, and the raising of the threshold for minimum investment in real estate, would help the Reit market here mature.

Property trusts would be required to invest at least 75 per cent of their assets in income-generating real estate, up from 35 per cent now, to bring rules in line with regulations in the United States, the UK and Hong Kong. However, this is not expected to have an impact on existing Reits, which have already crossed the threshold, sources said.

Overall, market players welcomed the proposed changes as those that would make the regulatory regime for Reits here 'tighter'.

'Anything that makes the market more transparent is good for investors,' Winston Liew, an analyst at OCBC Investment Research, told Bloomberg. 'On the regulatory front, the Singapore government has been very generous, but the next big step they need to address is on mergers and acquisitions.'

» Proposed Reit changes

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