MAS tightens rules for Reits to protect retail investors

No more discounts for institutional investors at listing time

THE Monetary Authority of Singapore (MAS) has tightened up the rules for property funds to improve the odds for retail investors.

Institutional investors or the big boys will no longer have discounts for subscriptions made at the time of the listing of a real estate investment trust (Reit) under new guidelines for Reits issued by MAS yesterday.

Another change limits what’s allowed under fixed-term management contracts to five years.

These fixed-term management contracts have been used by fund managers as a poison pill to entrench their positions and to provide an obstacle to takeovers, as it makes it expensive to fire them.

In a statement, MAS said the revised rules ‘are intended to improve safeguards for investors and to provide greater clarity and flexibility for commercial transactions’.

MAS said a majority of the respondents to its public consultation exercise in March raised objections to disallowing discounts to institutional investors.

They felt that the discounts are justifiable because such investors enter into binding subscription agreements prior to the launch of the initial public offering (IPO); institutional investors were also said to have helped ensure the success of a Reit offering, particularly in difficult markets, by providing a useful signal to the retail market about the quality of the Reit.

Those who wanted to retain the discounts suggested full disclosure, putting a cap on discounts and/or a moratorium or the sale of the Reit units.

But MAS said: ‘As a matter of policy, there does not seem to be any good reason why different groups of investors should be permitted to pay different amounts for the same interests in these assets at the time of the IPO.’

MAS said it is prepared to allow discounts that are given to investors who assume equity risks different from those of IPO investors, for example if they are willing to underwrite the listing.

On management contracts which have been a contentious issue, the new guideline said the term of a compensation provision should not be more than five years and the compensation amount payable to the Reit manager should not exceed the sum of the fixed component of unearned management fees (excluding variable or performance fees) over the remaining term of the provision.

Industry players had argued that entrenchment clauses in management contracts were to help professional Reit managers who do not hold large stakes in a Reit and ‘would be discouraged from establishing Reits in Singapore if there is no flexibility to implement measures to obtain appropriate compensation if they are removed as managers’.

But MAS said: ‘We continue to be concerned with entrenchment arrangements that impede the market for corporate control and place significant restrictions on the ability of unit-holders to terminate management contracts.’

Ronnie Tan, chief executive of Bowsprit Capital, the manager of First Reit, said he supported not giving discounts to institutional investors.

‘It’s not fair for the small investors,’ he said.

He added that if demand is an issue, ‘Reit issuers should look at pricing rather than use discounts as a (sales) mechanism’.

‘Removal of the poison pill (means) the takeover rules would be similar to other listed companies,’ he said on the new rule which makes it easier to fire the Reit manager.

Singapore, 28 September 2007…The Monetary Authority of Singapore (MAS) has issued revised Property Fund Guidelines (REIT Guidelines). The revised Guidelines are intended to improve safeguards for investors and to provide greater clarity and flexibility for commercial transactions. The Guidelines have also been rationalised to reduce compliance costs in a number of areas.

2. The changes include:

• Enhancing the disclosure requirements on the use of short-term yield-enhancing arrangements;
• Providing guidance on permissible fixed-term management contracts;
• Disallowing discounts to institutional investors for subscriptions made at the time of listing of a REIT;
• Specifying safeguards for REITs that intend to pay dividends in excess of current income;
• Requiring a REIT to invest at least 75% of its assets in income-producing real estate; and
• Removing the 5% single party limit for investments in real-estate related securities.

3. MAS will amend the Securities and Futures Act (SFA) to include REIT management as a regulated activity. The Securities and Futures (Licensing and Conduct of Business) Regulations and Securities and Futures (Financial and Margin Requirements for Holders of Capital Markets Services Licences) Regulations will also be amended to set out the capital requirements and licence fees for REIT managers, as well as provide for a transitional period for existing industry participants.

4. In revising the REIT Guidelines, MAS considered feedback from its public consultation in March this year and held discussions with REIT players. Our responses to the comments received from the public consultation are published on the MAS website. (Click here to view) MAS will continue to engage industry players and ensure that our regulatory regime remains progressive and keeps pace with the market’s development and growth.

Source : MAS