Following ratification of the Philippines' proposed real estate investment trust (Reit) regime at the start of October, the country should have a legal framework for pooled investment in property by early next year. Yet some are concerned that the rules are rather over-zealous in certain areas.

The Filipino model does a good job at picking out the best features of other relatively young Reit frameworks, such as those in Hong Kong and Singapore, says Milton Cheng, Hong Kong-based head of the Asia-Pacific Reit practice at law firm Baker & McKenzie.

But one unusual aspect of the Filipino rules is that the country's Securities and Exchange Commission will oversee not only the Reit managers, as is the usual practice, but also the managers of the property underlying the Reit, which is not.

In the proposals, the internal corporate governance checks and balances -- such as independence requirements and the need to have independent directors -- are replicated at the property manager level. "That's something we've never seen anywhere else," says Cheng. In most other places, it is the Reit manager's responsibility, as part of its overall management of the Reit portfolio, to oversee the performance of the property manager and "keep the property manager on the straight and narrow", he says.

Market players in the Philippines -- both the developers and the intermediaries who help put the Reit deals together -- feel this requirement may mean more constraints on the property management function than the market would normally expect, says Cheng.

In Hong Kong and Singapore, there are securities-licensing requirements, but at the Reit manager level, not the property manager level. Those rules typically require the terms of the property management arrangements to be at arm's length and properly disclosed, but it's not normally seen as necessary for separate corporate governance-type rules to be imposed on property managers themselves, says Cheng.

It is often the case that investors feel that the Reit sponsor -- the developer putting the properties into the Reit -- does a good job at property managing at the asset level and would like the Reit sponsor to continue to do so, he adds.

Moreover, the requirement raises the issue of whether the current securities regulatory framework is suited to regulating Reit managers and property managers. "In theory, it always sounds good to have more levels of checks and balances," he says, "but in practice, to make the regulation effective and user-friendly, you need to have the right set of rules and guidelines tailored to the particular product and its operating environment, administered by regulators with the relevant experience and knowledge."

Hence, says Cheng, there needs to be more detail about, for example, what criteria the regulator will use to assess the functional independence of property managers and Reit fund managers, and to assess whether the Reit management teams are qualified to manage the Reits and their property assets.

"There appears to be a gap in the framework here, similar to the gaps that used to exist under the rules in Hong Kong and Singapore, which the regulators there have since sought to address," he says.

Nevertheless, the Reit scheme is expected to attract strong investor interest. Reits offer institutional investors a hybrid class of exchange-traded investment that occupies the space between relatively risk-free fixed-income investments and riskier equity investments, says Cheng.

The hope is that the new Reit framework sends the right message in terms of equity capital market development in the Philippines generally, to encourage foreign asset managers to allocate more weighting to Filipino assets in their portfolios, he adds.

Senator Edgardo Angara, who proposed the Reit law initially, has talked of how the framework allows for "democratisation" of property assets, in that the man in the street can have an ownership stake in his country's shopping malls or office buildings.

Meanwhile, Francisco Lim, chief executive of the Philippine Stock Exchange, has commented that the country lags most Asian markets in terms of the types of exchange-traded contracts that are available. Only stocks and bonds are traded; there are no futures, options, exchange-traded funds and so on. Hence, Lim feels Reits will provide a welcome alternative, a new class of tradable investment.

The Reit legislation was ratified by both the Philippine House of Representatives and the Philippine Senate on October 1 and September 29, respectively. It is expected to come into effect within the next few weeks on its signing by the Philippine president. The implementing rules and regulations are due to be introduced within 90 days after that.

A handful of countries in Asia currently have Reit regimes: Hong Kong, Japan, Malaysia, Singapore, South Korea, Taiwan and Thailand. The Philippines is next in line, says Cheng, and some others are working on establishing frameworks, including mainland China, India and Pakistan.