Asia Reit rules need improving, says CFA Institute

The institute has drafted recommendations for better protection of unit-holders of Reits following discussions with regulators and fund managers, among others.
Asia Reit rules need improving, says CFA Institute

The Asia-Pacific region is the world's second biggest market for real estate investment trusts (Reits) – with 21% of total global Reit market capitalisation – but most Asian countries lag well behind regional leader Australia in terms of governance and investor protection.

Countries such as Hong Kong, Malaysia, Singapore and Japan have Reit frameworks in place, and the Philippines and Thailand are in the process of implementing rules.

But the real potential for Asian Reits lies in China and India, which have signalled their intent to draft regulations, notes Lee Kha-Loon, Asia-Pacific head of standards and financial market integrity at the CFA Institute.

Moreover, existing Reit rules in the region need improvement, argues the institute in a report it will launch today: Asia-Pacific Reits: Building trust through better Reit governance.

Reits offer a steady rental stream and high tax-effective yield, and provide an avenue for investors to invest in real estate without the large capital outlay and risk, says the report. “Unfortunately, sometimes these positive characteristics are clouded by Reit governance issues that can weaken unitholders’ rights.”

The CFA Institute makes various recommendations for existing Asia-Pacific Reit structures, as well as for what it feels would be an ideal Reit governance structure. The proposals cover areas including board independence of the Reit manager, annual general meetings (AGMs), ownership structure, removing Reit managers, management fee structure and gearing restrictions.

Reit regulations should provide a similar level of investor protection that is proved by public listed company rules, says Lee, but there's a “gap” between the two. For example, in Hong Kong, directors of a Reit are not elected as they are for a public company. The Reit is managed by a private company, he adds, and “this is a common weakness that needs to be addressed”.

Another CFA proposal is that no more than 50% of the Reit should be in the hands of one shareholder. “A unitholding restriction of 50% would not only improve Reit governance practices but also improve tax pass-through benefits for investors,” says the report. “A public float of at least 50% can help eliminate potential conflicts of interest between the controlling unitholder and other investors.”

With regard to gearing, CFA Institute argues that levels of leverage within Reits should not be regulated, so long as there is increased disclosure about debt covenants and debt restrictions imposed in trust deeds, says Angela Pica, policy analyst for the institute and author of the report.

“Unit-holders don't have many rights at the moment; the governance structure needs to be improved on,” she adds. “With greater disclosure in place, they would feel more at ease.”

The institute talked to regulators in various jurisdictions for the report, and Lee feels that they will be supportive of the recommendations and find them useful.

Pica echoes this point. Reit rules in Hong Kong, Japan and Singapore have not been around as long as those in Australia, so those less developed jurisdictions are often issuing consultation papers on this area, she notes, adding: “They are constantly looking for ways to rejuvenate these regulations.”

Australia is the largest and oldest Asia-Pacific Reit market, accounting for around 58% of the region's Reit market cap, followed by Japan with 20%, Singapore with 14%, and Hong Kong with 8%, according to the National Association of Real Estate Investment Trusts based in Washington DC.

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