Singapore Law Blog

The Monetary Authority of Singapore (MAS) on 10 June 2005 released a consultation paper on the proposed enhancements to the regulatory regime governing real estate investment trusts (REITs).
Some of the proposed enhancements include:

• licensing managers of Singapore constituted REITs;
• prescribing voting threshold for the removal of REIT managers;
  
• enhancing disclosure of transaction-based acquisition and disposal fees imposed by REIT managers;
• placing additional obligations on the REIT trustee to ensure that sufficient due diligence is performed;
• augmenting requirements applicable to related party transactions;
• facilitating overseas acquisitions and partial ownership of properties subject to safeguards to protect the interests of REITs and unitholders;
• allowing REITs to engage in the development of properties that they intend to hold after completion (subject to a cap of 10% of deposited property);
• giving REITs more flexibility to determine their debt ratios. We propose to retain the current 35% limit where the REIT is not rated. If the REIT has obtained and disclosed its credit ratings, we propose that it may exceed the 35% borrowing limit, with a cap at 60%. The current guideline allows a REIT to exceed the 35% borrowing limit (with no upper limit) if it obtains an "A" credit rating.

The Press Release:

PREFACE
A real estate investment trust (‘REIT’) established as a unit trust is regulated as a collective investment scheme (‘CIS’) under the Securities and Futures Act (‘SFA’). As with unit trusts investing in equity or debt securities, REITs structured as unit trusts are subject to parameters on permissible investments, borrowing limits and annual reporting requirements. The relevant rules are set out in the Property Fund Guidelines (‘Fund Guidelines’) under the Code on Collective Investment Schemes (‘Code’). The Fund Guidelines, introduced in May 1999, represented the culmination of extensive efforts of researching international best practices and consulting the industry to support the introduction of REITs¹ in Singapore.

2 Today, there are five REITs listed on the Singapore Exchange - all of which are structured as unit trusts.In the current low interest rate environment, investors have rapidly embraced this new asset class due to their relatively higher yields. Fuelled by the positive market sentiment towards existing REITs and tax incentives available, many entities have openly expressed interest in transferring their properties into REITs.

3 Although REITs structured as unit trusts need to comply with rules on permissible investments, borrowing limits and annual reporting requirements, they are regulated with a relatively light touch when compared with unit trusts investing in securities or other financial instruments regulated under the CIS regime (collectively known as ‘securities CIS’), or REITs in other jurisdictions.

Differences between REITs and Securities CIS

4 Despite being regulated under the same CIS regime, there are several inherent differences between REITs and securities CIS. The risks arising from the differences are set out below:

(a) Structural differences: Securities CIS are open-ended investment vehicles; the manager is required to stand ready to sell or redeem units of the CIS at net asset value (‘NAV’). On the other hand, REITs are close-ended investment vehicles and investors have to exit their investments on the exchange. Market sentiment and confidence will play a part in determining the price at which investors can acquire or exit their investments, which may result in REITs not trading near their NAV.

(b) Liquidity of underlying assets: The timeframe needed to dispose of real estate is much longer and the actual sale price could be much lower than the book value and/or valuation of the properties in the event of liquidation. Unlike securities CIS, REITs may not be able to liquidate their holdings readily at NAV or values close to NAV.

(c) Valuation of underlying assets: Unlike securities CIS where market quotations of the underlying financial instruments are readily available, the valuation of real estate held by REITs is more subjective in nature.

(d) Related party transactions: REITs are usually sponsored by property holding/development companies, i.e. they are formed with properties acquired from these related parties. After their formation and listing, most REITs continue to transact with related parties.

5 With experience gained from administering the Fund Guidelines, MAS is of the view that the existing regulatory framework can be enhanced to help maintain investors’ confidence and to achieve long-term sustainable growth in the nascent but fast growing REIT industry.

6 Taking into account market developments as well as regulatory developments in other jurisdictions, MAS has undertaken a review of the REIT regulatory framework and had preliminary discussions with REIT managers, REIT trustees and institutional investors. The proposals to enhance the current Fund Guidelines will:
(a)strengthen oversight of REIT managers;
(b)improve corporate governance practices; and
(c)better align the interests of REIT managers and unitholders.

7 MAS will continue to monitor international developments and best practices to enhance the regime for the REITs industry in order to promote and sustain its growth.

Request for Comments

8 MAS invites interested parties to give their views and comments on the proposals set out in this consultation paper. Comments may be submitted to:
Corporate Finance Division
Securities and Futures Supervision Department
Monetary Authority of Singapore
10 Shenton Way
MAS Building
Singapore 079117
Email: reits@mas.gov.sg
Fax: (65) 6225-1350

MAS would request that all comments and feedback be submitted by 11 July 2005.

9 Please note that all submissions received may be made public unless confidentiality is specifically requested for whole or part of the submission.

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Footnotes
¹ In July 1998, MAS accepted the recommendation of the then Stock Exchange of Singapore Review Committee to support the introduction of REITs in Singapore.