The article was first published in The Business Times on 6 April 2017.

In the first of this two-part article, we explored some options available to unitholders of a Real Estate Investment Trust (Reit) to hold a Reit manager accountable for its actions. In this second part, we discuss the impact of the Securities and Futures (Amendment) Act 2017, and consider whether recent events in the Reits industry will impact and shape discourse on future development of the Reits regime.

Putting unitholder interests first

When the 2017 SFA Amendment Act becomes effective, a Reit manager will have a statutory duty to act in the best interests of the unitholders and to give priority to the interests of unitholders over its own interests, or the interests of its shareholders, should there be a conflict of interest. Breach of this duty renders the manager liable to all unitholders for any profit, directly or indirectly made by it or any of its related companies, or for any damage suffered by the unitholders as a whole. This is also a criminal offence, where the Reit manager may be liable to a fine not exceeding S$100,000.

The 2017 SFA Amendment Act also imposes duties on the directors of the manager to take all reasonable steps to ensure that the Reit manager discharges its duties and to give priority to the interests of unitholders over the manager's own interests, or the interests of the manager's shareholders, should there be a conflict of interest.

Directors who contravene these duties will be liable to all unitholders for any profit, directly or indirectly made by them or the manager or any of the Reit manager's related companies, or for any damage suffered by the unitholders as a whole. This is also a criminal offence, where the directors may be liable to a fine not exceeding S$100,000 or up to two years imprisonment.

There are three important qualifiers to these statutory duties. First, the 2017 SFA Amendment Act has not yet taken effect, and thus these provisions are still outside the range of options available to unitholders.

Second, proceedings against a director of a Reit manager would only be allowed where the Reit manager has conducted the affairs of the Reit or exercised its powers in a manner that is oppressive or disregards unitholders' interests, or where an act of the Reit manager has been done or is threatened which unfairly discriminates or is prejudicial to unitholders. As examined in the previous article, it is not presently clear how the Singapore courts will interpret or apply these requirements.

Finally, the 2017 SFA Amendment Act is not likely to have retrospective effect, which means that it is not clear whether the actions taken by a Reit manager or its directors before the date when the 2017 SFA Amendment Act becomes effective, can be used to support a claim for breach of these new statutory duties.

It remains to be seen whether a Reit manager who had placed itself into a position of conflict before the effective date of the 2017 SFA Amendment Act, and continues to be in such a position of conflict thereafter, would be liable for a breach of any statutory duties.

What's next for the Reits regime?

In light of the above challenges, would further changes need to be implemented in the Reits regulatory regime in the foreseeable future?

Here we would point out that the revised Code on Collective Investment Schemes (CIS), which was issued on Jan 1, 2016, and the 2017 SFA Amendment Act, resulted from a wide-ranging consultation on enhancements to the regulatory regime governing Reits and Reit managers, initiated by the Monetary Authority of Singapore (MAS) as recently as 2014. The revised CIS incorporated changes to, among others, align the performance fee structure with the long-term interests of a Reit's unitholders, and enhance disclosures relating to income support payments.

In the consultation, MAS requested feedback on whether the current approach of relying on unitholders to initiate a review of the Reit manager's appointment is effective, and if not, the additional possible measures that could be considered. MAS noted that "respondents were of the view that it is currently not difficult for unitholders to convene an extraordinary general meeting to obtain a simple majority that is needed to remove a Reit manager". MAS also noted that there was a general consensus that the current approach is broadly effective, and that no regulatory intervention was needed at that time. However, as examined in the previous article, such recourse may not be feasible for unitholders of a Reit whose units are still substantially held by the Reit's sponsor and related parties.

At this juncture, it is not clear what further regulatory change in the Reits regime could be implemented. One possible avenue is to explore targeted requirements to prevent the "clever financial engineering" that a Reit manager may undertake "to disguise inherent blemishes", such as an acquisition by the Reit manager of assets at inflated prices and the leaseback of these assets to the vendor at inflated rents, which Ho Ching cautioned against in her speech marking the listing of MapleTree Logistics Trust on July 28, 2005.

Aligning interests

Another possible way forward would be for stakeholders to revisit the measures to ensure the interests of all unitholders are aligned with those of the Reit manager, and consider whether the existing suite of measures to promote financial transparency and improve corporate governance are sufficient. These could include examining the compensation structures adopted in the industry and subject the same to tighter parameters including independent approval by unitholders at annual general meetings such that the Reit manager's fee structure is more closely aligned with the long-term interest of the Reit and its unitholders, and adopting best practices with respect to the charging of acquisition and divestment fees by a Reit manager by subjecting the same to a mandatory review and approval process by the audit and/or risk committee(s). These measures were not implemented in the last review of the Reits regime, in light of the varying business models of Reits and practical difficulties in implementation, respectively.

In addition to strengthening investor confidence in Reits, these proposed changes would need to be balanced against attracting more Reit listings to Singapore and possibly stymieing the development of S-Reits as an asset class.