Saturday, March 26, 2011

Warning to Real Estate Investors

Press Release: The CFA Institute Calls for Stronger Governance as Philippines Finalize Own REIT Legislation 

Investors Beware – REITs Governance and Fees can significantly impact your investment

As the Philippines continuously work to process finalization of its REIT legislation, CFA Institute, the global association of investment professionals, released its report “Asia-Pacific REITs: Building Trust Through Better REIT Governance” from its Hong Kong office. The report aims to provide a guide on effective governance structures for regulators and industry participants in new or prospective Real Estate Investment Trusts (REITs) structures and help regulators in existing REIT markets improve their current REIT governance standards and minimize conflicts of interest between external management and REIT unitholders.

According to the report, the Philippine REIT Law or Republic Act No. 9856 was incorporated into law in December 2009. However, the country is still in the process of finalizing the legislation and expects to have its first REIT listed this year.

“REITs provide many benefits to investors including a high yield, pass-through taxation and diversification, however despite these REIT governance remains far from adequate. Better REIT governance structures and regulations will increase trust and confidence and facilitate growth in new and prospective markets,” said Mr. Lee Kha Loon, CFA, head of Standards and Financial Market Integrity – Asia Pacific at CFA Institute.

The report reviews governance practice in the four largest REIT markets in the region (Australia, Japan, Singapore, and Hong Kong) and examines ways to rebuild investor trust through better governance structures. REIT sponsors, managers, and unitholders often have different and occasionally conflicting interests, therefore, structural reforms are called for to protect investor interests in REITs.

Case studies cited in the report demonstrate weaknesses of current governance practices and the effect on REIT unitholders, including limiting the potential for acquisition of a REIT at favorable prices because of conflicted interests of the dominant unitholder; REIT fee structures that reward growth in assets at the expense of value creation; manager entrenchment and the potential conflicts from related party transactions among various interests associated with a REIT.

The report proposes important changes to existing REITs regulations under the current regulatory structures. In addition, the report proposes a model governance structure for REITs. It recommends REIT management to be internally managed rather than outsourced; an independent board of directors subject to election and removal by unitholders; annual general meetings for REITs to afford unitholders opportunity to meet and query REIT management; approval by independent unitholders of related party transactions; and a limit on majority unitholder positions of 50 percent of the issued units, to better align interests and preserve minority unitholder tax pass-through benefits.

"Given the infancy of some REIT markets in Asia and the potential for growth in new markets, we believe better governance will help in long term value creation for the investor," said Lee.

More information is available by accessing the report on CFA Institute website or contacting Mr. Lee Kha Loon.

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