Author
John Sullivan  
Partner

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Richard Mazzochi
(馬紹基)
Partner

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Hong Kong
Hayden Flinn  (范凱敦)

London
Adrienne Showering  

Sydney
Tim Blue  
John Sullivan  

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Recent positive regulatory developments in Hong Kong and Singapore make it an exciting time for real estate investment trusts. There are now seven REITs listed in Singapore and three REITs listed in Hong Kong. The regulatory developments should encourage further growth in domestic and cross-border REIT activity.

While several of the regulatory changes aim to accommodate overseas investments, all REITs listed in Hong Kong and Singapore are affected by the developments.

Singapore

On 20 October 2005, the Monetary Authority of Singapore released revised Property Fund Guidelines. The new Guidelines strengthen oversight of REIT managers, enhance corporate governance and investor disclosure, facilitate overseas acquisitions (through allowing partial ownership of properties) and provide for an average leverage limit of 35% of total asset value, increasing to 60% where the REIT is rated by a major rating agency. The changes follow new substantial unitholder notification requirements which started operating from 1 July 2005.

Hong Kong

In June 2005, the Hong Kong REIT Code was changed to allow REITs to invest in overseas real estate and to increase the maximum borrowing ratio from 35% to 45% of total gross asset value. These changes were balanced by enhanced investor disclosure and corporate governance requirements. Additional requirements were introduced for REIT managers, particularly those with overseas investments.

Hong Kong REITs can invest globally, but subject to greater disclosure/management obligations

Hong Kong’s Securities and Futures Commission amended the Code on REITs on 17 June 2005.

Some of the key amendments

• REITs can now invest in overseas real estate.
• The maximum borrowing ratio has increased from 35% to 45% of the total gross asset value of the REIT.
• Management companies are required to conduct due diligence investigations before investing in a particular property or country.
• There must be enhanced investor disclosures in the offering documents and by the management company regarding the overseas markets to be invested in by the REIT and the associated risks.
• The management company need no longer own 100% of all real estate, but must have majority control.
• REIT management companies must appoint listing agents with the same functions as a sponsor of a company seeking to list. The listing agent must also conduct its own independent due diligence on the properties in the REIT.
• Responsible officers of a REIT management company may now count experience in property portfolio management to be eligible.
• Payment of management fees by way of units in the REIT and payment of performance fees by reference to distribution increases may be allowed by the SFC on a case by case basis.

More information about the revised Code on REITs is available in our more detailed review.

The SFC has also recently issued its Consultation Conclusions on proposed amendments to the Securities and Futures Ordinance. This has confirmed that REIT management is a regulated activity which requires a licence from the SFC.

Although the SFC has always required a REIT management company to hold a Type 9 (Asset Management) licence, it was unclear that such activities were included in the definition of “asset management” in Schedule 5 of the Ordinance.

The definition of “asset management” has now been amended with effect from 6 January 2006 to specifically include REIT management activities for REITs that have been authorised by the SFC.

Singapore developments

Revised Property Fund Guidelines

After public consultation the Monetary Authority of Singapore released revised Property Fund Guidelines governing REITs on 20 October 2005.

Some of the key changes

• Increased requirements for REIT managers (eg minimum capital, senior management experience, mandated activities to be performed in Singapore). Longer term, MAS plans legislative changes to introduce a specific licensing framework for managers similar to other jurisdictions such as Hong Kong and Australia.
• Enhanced corporate governance practices.Trust deeds must allow unitholder meetings at the request of 50 unitholders or unitholders with 10% of units (whichever is less), and removal of REIT managers by approval of 50% of unitholders present and voting (with no unitholders excluded from voting). The provisions must be in trust deeds for existing REITs by 20 April 2006.
• Expanded requirements for “interested party” transactions. Two independent valuations are now required before the transaction occurs and any transaction fee payments must be in units.
• Increased disclosure requirements for acquisition and disposal fees to REIT managers, as well as of REITs’ tenant profiles.
• Facilitating overseas investment by allowing partial ownership of properties through special purpose vehicles. This is subject to various investor protection safeguards.
• Providing for an average leverage limit of 35% of a REIT’s total asset value, increasing to 60% where the REIT discloses a credit rating from a major rating agency. The limit now applies to deferred acquisition payments as well as borrowings.
• Relaxation of valuation rules for new issues of units. If the last real estate valuation is more than six months old a desktop valuation (rather than a full valuation) is sufficient.
• Allowing REITs to develop properties they intend to hold on completion, subject to an overall limit of 10% on developments and investment in uncompleted properties.

More detailed information is available in our review of the revised Guidelines.

Substantial unitholder notification requirements

The Singapore Securities and Futures Act was amended from 1 July 2005 to require substantial unitholders of a Singapore listed REIT to disclose their holdings to the Singapore Exchange and the REIT trustee (including any subsequent change in the percentage level of such holdings or their ceasing to hold 5% or more of the total number of units) within two business days of the relevant acquisition, change or cessation.

It is an offence to fail to comply with the notification requirements. Offenders may be fined up to S$25,000 (plus S$2,500 each day the offence continues).

Prior to these amendments, substantial unitholders only had obligations of disclosure where included in the REIT trust deed.

Our Asian REIT Team

Our team has extensive experience in acting on REIT transactions. We can draw on the wide experience of our firm which has been heavily involved in the development of the Australian listed property trust markets since their inception in the 1980s. We have extensive IPO experience in Hong Kong and have acted on several Singapore REIT transactions.

We advise on all aspects of REIT transactions including:

• the corporate, trust, security and financing structures for REITs
• establishing REITs and preparing REITs for listing including preparing and advising on REIT prospectuses and trust documentation
• listing documentation including underwriting agreements
• submissions to stock exchanges and securities regulators
• coordinating marketing and securities law advice from foreign counsel
• structuring property acquisitions to feed into REITs
• acquisition and joint venture documentation in the context of REITs.

Our experience extends to:

• active involvement in the Hong Kong, Singapore, Taiwan and Australian REIT markets
• developing the Asian REIT market including playing a lead role lobbying the Hong Kong SFC over several years
• acting as international counsel on several recent Singapore REITs including:

• we are also actively involved in several current Hong Kong REIT proposals.

Mallesons Stephen Jaques practises Hong Kong, English and Australian law.