The Monetary Authority of Singapore (MAS) released a consultation paper on Thursday which contained several proposals to strengthen the real estate investment trust (REIT) market.
The stated objectives of the proposals were to enhance transparency and improve the attractiveness of REITs to issuers and investors. As of the end of September, there were 33 listed Singapore REITs which may be affected by the proposed changes.
There are 26 proposals in all and the MAS is seeking public feedback for a number of them. Here are a few of the highlights of the consultation paper:
1. Increasing the Leverage Limit and Development Limit
Under current rules, REITs without a credit rating can only borrow up to 35% of their total assets while those with a rating can go up to 60%. MAS is proposing to pull the leverage limit up to a single-tiered figure of 45% for all REITs
35% figure up to 45% and remove the 60% limit and “remove the option for a REIT to leverage up to 60% by obtaining a credit rating.” According to MAS, two-thirds of REITs in Singapore have credit ratings.
A higher development limit of 25% was also proposed by MAS, an increase from the current limit of 10%. But, REITs wanting to adopt the higher limit must pass through a few hoops, which include obtaining shareholder approval. The additional 15% allowance (above the current 10% limit) can also only be used to redevelop existing properties which the REIT has already owned for at least three years and which the REIT would continue to hold for another three years after redevelopment.
The current 10% development limit has kept out most of the smaller-sized REITs from tapping into the development of properties (or redevelopment of existing real estate) as an option for growth. To my knowledge, there hasn’t been a long track record of greenfield developments amongst REITs yet, but my fellow Fool Chong Ser Jing shared that Singapore’s oldest REIT, CapitalMall Trust (SGX:C38U), already has some fingers in the development pie.
2. More comprehensive disclosures
MAS is proposing to enhance disclosure standards for REITs in a number of areas which include:
- Total Operating Expenses as percentage of the net asset value of a REIT
- The amount of income support payment received by the REIT
- Disclosure of any material deviation of the actual distribution per unit (DPU) from forecast; a detailed explanation for the deviation would also have to be given
- Debt Maturity Profile
- Weighted average lease expiry (WALE) of new leases
- Remuneration policies and procedures
- Remuneration of individual directors and CEO of the REIT manager on a named basis
- Remuneration of the top five key executive officers of the REIT Manager (in bands of $250,000)
My fellow Fool Stanley Lim has previously highlighted differences in the base fee structures between REITs such as CapitaCommercial Trust (SGX: C61U) and Ascendas Real Estate Investment Trust (SGX: A17U). So, there may be opportunities for individual investors to better understand each REIT’s remuneration policies and fee structures in order to find an investment which best suits the investor’s objectives.
3. Alignment of management incentives
MAS is inviting feedback and alternative proposals for changes to be made to the performance fee of REIT managers.
Initial iterations of MAS’s proposal include putting in place the requirement for the performance fee to be linked to metrics which “takes into account the long-term interest of the REIT and its unit-holders such as net asset value per unit or distributions per unit.” Another of MAS’s proposal is for the performance fee not to be linked with the REIT’s gross revenue.
Besides performance fees, REIT managers are typically entitled to acquisition and divestment fees when the REIT buys or sells properties in its portfolio.
For both fees, MAS is seeking views on its proposal to limit the acquisition and divestment fees to expenses incurred which are related to the transaction alone (in other words, the fees are to be determined on a ‘cost recovery’ basis). The concern being addressed here is the possible “asset growth” bias which may occur if the REIT manager is incentivized by acquisition or divestment fees. Another view shared was that pegging the fee to the acquisition size may not match the efforts expanded, particularly when the REIT manager is already being paid management and performance fees.
4. Independence of Board of Directors
According to MAS, as of 30 September 2014, 24 of the 33 REIT managers have Boards that are at least half-independent, while 15 of the 33 REIT managers have Boards that are majority-independent.
Current rules require a REIT manager to ensure that at least one-third of its Board are independent directors. MAS is proposing some changes to the current rule and the regulator has given two options which would ultimately have at least half of the Board of Directors made up of Independent Directors.
In a related field, MAS also has a proposal for changes to be made to Audit Committee requirements.
Foolish take away
On a personal note, I would welcome more transparency regarding a REIT’s operations and the incentives of its management team. This can be beyond the proposals above. For instance, cool REITs such as CapitaMall Trust have begun to share the webcasts of their earnings presentations as well. This gives the individual investor an equal chance to consider information shared by a REIT in such presentations.
More importantly, when it comes to investing in a REIT, individual investors should also consider the proposed changes above in conjunction with the sector, the quality of the properties in a REIT, and the management team behind the REIT. This is particularly pertinent with regard to the proposed changes in the development limit and the leverage limit (hint: giving more leeway to REITs with poor capital allocation and property development skills would not be beneficial to investors).
Coming back to the proposed changes, MAS will be collecting feedback up till 10 November 2014. According to Channel News Asia, any proposals which go through are estimated to take effect in 2016.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong doesn’t own shares in any companies mentioned.