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Revised Property Fund Guidelines Enhances REITs Regulatory Regime
December 2007 | Finance | Business Bulletin

Introduction 
On 28 September 2007, the Monetary Authority of Singapore ("MAS") issued revised Property Fund Guidelines ("Guideline"). The Guidelines are found in the Code of Collective Investment Schemes ("Code").

This revision is intended to:-

1. improve safeguards for investors;
2. provide greater clarity and flexibility for commercial transactions; and
3. rationalise guidelines where compliance costs exceed benefits.

This article highlights some key amendments in this revision.

Improving Safeguards for Investors
Under the Guidelines, the long-term effects of short-term yield enhancing arrangements have to be disclosed.

Institutional visitors are not entitled to discounts. However, this prohibition does not apply if such investors subscribe prior to the listing and assume the risks of non-completion of listing and/or have to pay for the units regardless of the success of listing.

These measures help level the playing field for small investors.

In addition, arrangements at listing which materially restrict the removal of REIT managers are now prohibited. Such arrangements may only be made post-listing and must be based on normal commercial terms and approved by a majority of unit holders at a general meeting.

For a REIT manager who wishes to declare dividends in excess of profits, the manager now has to certify, in consultation with the trustee, that it is satisfied on reasonable grounds that, immediately after making the distribution, the REIT will be able to fulfill, from its deposited property, its liabilities as they fall due.

Providing Greater Clarity and Flexibility
REITs are primarily intended to be income-producing vehicles investing in real estates. MAS has re-enforced this by requiring REITs to invest at least 75% of their assets in income-producing real estate. In addition, a property fund should not derive more than 10% of its revenue from sources other than rental payments or interest, dividends, and other similar payments from special purpose vehicles and other permissible investments of the REIT.

MAS has maintained the limit for property development investment at 10% of the REIT's assets. Thus a REIT is allowed only a small exposure to risks associated with property development in proportion to its overall assets.

However, MAS has introduced greater invesment flexibility by removing the restriction that a REIT may only invest a maximum of 5% of its assets in securities issued by a single party. In conjunction with this, the Code on Takeovers and Mergers has been extended to govern situations where one REIT tries to take control of another REIT.

Greater flexibility has also been introduced by allowing REIT joint ownership through investments as tenants-in-common.

Reducing Compliance Costs
The Guidelines have also relaxed requirements in situations where perceived compliance costs exceed benefits. MAS has removed the previous restriction that valuers of a REIT's assets were only allowed to receive a maximum of $200,000 per financial year from parties buying from or selling assets to the REIT and has relaxed the valuation requirements prior to the issuance of new units in the REIT post-listing.

Looking Ahead
The amendments, hopefully, will give greater protection to the small investor and increase the transparency of the operation of REITs.

Following on from these amendments, MAS will be introducing a licensing framework for REIT managers under the Securities and Futures Act, Cap. 289.