Author
Hayden Flinn  
(范凱敦)
Partner

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Richard Mazzochi
(馬紹基)
Partner
T +852 3443 1046

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Hong Kong
Hayden Flinn  (范凱敦)

London
Adrienne Showering  

Sydney
Tim Blue  
John Sullivan  

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On 20 October 2005, the Monetary Authority of Singapore (MAS) released revised Property Fund Guidelines governing REITs. The new Guidelines:

• strengthen oversight of REIT managers
• enhance corporate governance and investor disclosure
• facilitate overseas acquisitions (through allowing partial ownership of properties)
• 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 revised Guidelines were introduced after a public consultation process carried out since June 2005.

Proposed regulatory framework for REIT Managers

REIT managers are not currently licensed or regulated under the Singapore Securities and Futures Act. MAS plans to amend the Act to make REIT management a separate regulated activity. There will be a separate consultation process about the necessary changes to the Act. Existing REIT managers will have a transitional period to comply with the new regulatory framework when introduced. The new framework will bring Singapore more into line with other jurisdictions such as Hong Kong and Australia.

In their June 2005 consultation paper, MAS proposed the framework would include:

• licensing of the corporate principal and its representatives
• approval of people to be appointed as CEO or director
• requirements on financial resources, adjusted net capital, conduct of business and safeguarding of investor funds
• admission criteria for REIT managers similar to that for securities scheme managers
• admission criteria for individual representatives similar to those for representatives who conduct other types of regulated activities.

Supervision requirements under the Guidelines

Pending the licensing changes for managers, MAS has increased the requirements on managers under the Guidelines.

A REIT manager must now have minimum shareholders funds of S$1 million. To allow MAS to effectively oversee their activities, REIT managers must have a physical office in Singapore. They must have a Singapore resident CEO and at least two full-time resident professional employees. The Singapore office must “play a meaningful role in the business activities of the manager”.

REIT managers must also perform their accounting, compliance and investor relations functions in Singapore, and maintain investment and financing records in Singapore.

Improving corporate governance practices

The Guidelines formalise the current market practice that a unitholder meeting may be convened at the request of 50 unitholders or unitholders representing 10% of units (whichever is less).

A REIT manager may now be removed by 50% of unitholders who are present and voting (with no unitholder being excluded from voting). The possibility of a higher percentage but with the manager excluded from voting was rejected.

These provisions must be included in the trust deed of the REIT. Existing REITs must amend their deeds by 20 April 2006.

The Guidelines place additional obligations on a REIT trustee to ensure that it exercises all necessary due diligence to protect the rights and interests of unitholders. This includes exercising due diligence when the REIT is initially set up and on an ongoing basis.

Interested party transactions

The Guidelines expand the interested party transactions requirements as follows:

• the REIT must obtain two independent valuations of the properties, with one of the valuers commissioned independently by the trustee
• in the case of an acquisition, the transaction price must be at or below the higher of the two independent valuations
• in the case of a disposal, the transaction price must be at or above the lower of the two independent valuations
• the trustee must provide written confirmation that it is of the view that the transaction is on normal commercial terms and not prejudicial to the interests of unitholders where:

Any percentage based fee paid to the REIT manager where the acquisition or disposal is to or from an interested party must be made to the REIT manager in the form of units in the REIT at market value instead of cash. These units cannot be sold by the manager within one year of their issue.

MAS has extended the ambit of “interested parties” in the Guidelines to include the trustee of REITs.

The Guidelines now require that REIT managers disclose, in percentage terms and/or dollar value terms, the following during an acquisition:

• any acquisition fee payable to the REIT manager; and
• if a profit forecast is made:

For any disposal, REIT managers must also disclose, in percentage terms and/or dollar value, the percentage based disposal fee payable to the REIT manager and substantiate why the disposal would be in the interests of unitholders.

Facilitating overseas investment by allowing partial ownership of properties (subject to investor protection safeguards)

The Guidelines facilitate the acquisition of overseas properties by allowing partial ownership of properties. However there are safeguards to protect investors.

When a REIT intends to invest in a property as a part-owner, it must:

• make its investment by acquiring shares or interests in an unlisted single purpose property holding vehicle (SPV);
• have freedom to dispose of its investment in the SPV;
• have veto powers over certain key operational issues of the SPV; and
• agree upfront with its joint venture partners on the minimum percentage of the distributable profits of the SPV that will be paid to its investors, and the REIT should be able to receive its pro rata share of such distributions.

Enhancing disclosure on tenant profile

The Guidelines require that the offering documents and annual reports of a REIT disclose, on a portfolio basis:

• total number of tenants
• top ten tenants and the percentage of gross rental income attributable to each of these top ten tenants
• trade sector mix of tenants, in terms of the percentage of total net rentable area and gross rental income attributable to major trade sectors
• lease maturity profile, in terms of the percentage of total gross rental income for each of the next five years.

Valuation

The Guidelines relax the valuation requirements where the REIT makes new issues of units. If the last valuation of real estate assets is more than six months old, a desktop valuation (rather than a full valuation) is sufficient.

Change in leverage limits

The Guidelines provide for an average leverage limit of 35% of a REIT's total asset value, increasing to 60% where it discloses a credit rating from a major rating agency. The REIT will need to retain its rating so long as its average leverage exceeds 35%. There is a 35% average leverage limit where the REIT is unrated.

Previously, a REIT could exceed a borrowing limit of 35% of its deposited property only when it had a credit rating of at least “A” from a major rating agency, in which case there was no upper limit.

Deferred acquisition payments need now be included within the limit as well as borrowings. Existing REITs which now exceed the limit have until 20 April 2006 to bring their leverage back under the limit.

Investments in property developments

The Guidelines allow a REIT to engage in the development of a property that it intends to hold in its portfolio when completed, subject to the condition that a maximum 10% of the REIT’s assets are tied up in property development activities or investments in uncompleted property developments.

Previously, a REIT was prohibited from engaging in property development activities but could invest up to 20% of its assets in uncompleted property developments.