ARE the interests of real estate investment trust (Reit) unitholders well protected? The answer from CFA Institute's review of Asia-Pacific Reit markets is not assuring.
More can be done to improve the governance of Reits in Singapore, Australia, Hong Kong and Japan, the institute says in a 75-page report. In particular, Reit managers should have boards that are mostly independent.
'Reits provide many benefits to investors, including a high yield, pass-through taxation and diversification. However, despite these, Reit governance remains far from adequate,' says CFA Institute's head of standards and financial market integrity (Asia Pacific), Lee Kha Loon.
'Better Reit governance structures and regulations will increase trust and confidence and facilitate growth in new and prospective markets.'
The report calls strongly for Reit managers to be independent. In a common scenario, the Reit sponsor wholly owns the Reit manager, and also holds a large stake in the Reit.
'This interrelatedness increases the risk that the manager or sponsor will act in its own interest at the expense of minority unitholders, thereby exacerbating the principal-agent conflict,' the report explains.
Cases of sponsors selling properties to Reits have triggered concerns about conflicts of interest, and unitholders have asked if there is a real need to buy the assets, says Moody's Investors Service associate analyst Alvin Tan.
According to CFA Institute, one way to better protect unitholders is to make sure that most directors on the boards of Reit managers are independent. This means that they should not be related to management, sponsors and substantial unitholders.
This is an area which Singapore should work on, Mr Lee tells BT. There is the non-binding Code of Corporate Governance, which recommends that independent directors form at least a third of the board, but that may not be stringent enough, he says.
Mr Lee believes that licensing requirements should mandate that most directors on a Reit manager's board be independent. In particular, the chairman should be independent, and there should not be any cross-directorships which could cause conflicts of interest.
Moody's Mr Tan sees merit in this proposal. Having a more independent board will to some extent reduce the impression that conflicts of interest exist, he says.
CFA Institute also suggests that Reits make annual general meetings (AGMs) compulsory, so that unitholders can meet the people managing their investments and question decisions.
In this area, Singapore's system matches up. From January last year, all Reits have to hold AGMs once a year, not more than 15 months from the last AGM.
Another recommendation involves the creation of a fee structure that rewards managers for growing unitholder value, and penalises them for a poor showing. One way is to link the performance fee to growth in distributions per unit, the report says.
Assuming that proper governance practices are in place and that unitholders' rights are not compromised, there would actually be no need to regulate the amount of leverage Reits can have, the report says. Debt funding should remain a business decision.
In Singapore, a Reit's aggregate leverage is capped at 35 per cent of its deposited property, or 60 per cent if it has a credit rating and publicises it.