Since the advent of Singapore’s first REIT more than a decade ago, significant changes have been introduced to the regulatory regime to ensure adequate protection is accorded to REIT unitholders. As noted by the Monetary Authority of Singapore (MAS), the REITs market in Singapore has ballooned to an impressive aggregate market capitalisation of more than S$61 billion. As an investment option that brings to investors tax-efficient, stable and regular returns, it is not surprising that interest from retail investors has been growing significantly. The challenges and issues faced by REIT unitholders over the last ten years or so have made it necessary for MAS to take further steps to enhance regulatory protection for REIT investors.
In its latest round of public consultation, MAS has put forward proposals that are “geared towards fostering stronger governance practices and greater alignment of interests, whilst providing REITs with more operational flexibility to enhance their portfolio to deliver stronger performance”.
Some of the key areas that MAS is seeking to address include the following:
- To strengthen corporate governance, MAS is proposing to impose a statutory duty on a REIT manager and each of its directors to (in the event of a conflict) prioritise the interests of the REIT’s unitholders over those of the REIT manager and its shareholders. Unlike the directors of a company who have fiduciary duties to act in the interests of the company and, indirectly, the interests of the shareholders, such duties are not clearly defined in the case of a REIT manager. The imposition of a statutory duty on a REIT manager will bring it in line with the requirements that are applicable to trustee- managers of business trusts.
- Currently, the right to appoint a director to the board of a REIT manager lies solely with the shareholders of the REIT manager and not the REIT’s unitholders. MAS is now studying two approaches to enhance the existing requirement for at least one-third of the board of a REIT manager to be independent directors. One of the proposals is for the current one-third requirement to continue to apply provided that the REIT’s unitholders are given the right to appoint the directors of the REIT manager. If the right of appointment of directors remains at the sole discretion of the shareholders of the REIT manager, at least a majority of the members of the board of the REIT manager must be independent. The alternative proposal is to uniformly require at least a majority of the board of a REIT manager to be independent directors.
- In order to align the interests of a REIT manager with those of the REIT’s unitholders, MAS is also looking to prescribe guidelines and principles that a REIT manager should abide by when putting forward its fee structure in terms of management fees, acquisition fees, divestment fees and development management fees. In particular, MAS is of the view that any performance fee to be paid to a REIT manager should be computed based on a methodology that meets the following principles:
- the performance fee should not be linked to the REIT’s gross revenue
- the performance fee should be linked to an appropriate benchmark that takes into account the long-term interest of the REIT and its unitholders (for example, the net asset value per unit or distributions per unit)
- crystallisation of the performance fee should be limited to once a year.
- On a personal level in respect of each of the directors and executive officers of REIT managers, MAS has also proposed certain restrictions which seek to ensure that the remuneration or fees payable to a director or an executive officer do not result in a misalignment of interests. One such restriction is the prohibition against the payment of remuneration in the form of shares or interests in the sponsor of the REIT or the sponsor’s related entities.
Apart from proposals aimed at strengthening corporate governance, MAS has separately proposed a set of new or modified guidelines to allow for more operational flexibility. The current guidelines on leverage limit for a non-credit rated REIT is 35% and a credit-rated REIT, 60%. The proposal is to adopt a single-tier leverage limit of 45% (with or without credit rating). Recognising that REITs must have sufficient leeway to rejuvenate their portfolios (especially when their portfolios mature, resulting in the need to undertake redevelopment and refurbishment), MAS has suggested an increase to 25% (from the current 10%) development limit subject to fulfilment of certain conditions (for example, the additional 15% allowance should only be used solely for the redevelopment of an existing property that has been held by the REIT for at least three years and which it will continue to hold for at least three years after redevelopment).
REIT managers may well face a mandatory requirement to procure professional indemnity insurance (or, in lieu, a letter of undertaking from the REIT manager’s parents) that serves to protect the REIT manager against claims arising out of the provision of professional advice.
As part of its on-going efforts to develop the attractiveness and sophistication of the REITs market in Singapore, MAS is looking into the possibility of allowing stapled securities structures that allow the stapling of the units of a REIT with the shares of an entity with active operations subject to a series of conditions that seek to protect the interests of the REIT’s unitholders as a whole.
MAS has further indicated that more stringent disclosure requirements, many of which are in relation to a REIT’s annual report, will be introduced.
The consultation paper containing the full list of proposals as well as the background and rationale to each of such proposals may be accessed via the website of MAS, www.mas.gov.sg.