Reits must address issues related to independent directors, overseas assets: SGX RegCo
Given the "growing interest" to list Reits here that have international assets, there is a "pressing need" for the industry to raise its standards: SGX RegCo CEO
Singapore-listed real estate investment trusts (Reits) should address issues related to the independence of their directors and the valuations of their overseas assets, said Singapore Exchange Regulation (SGX RegCo). The market regulator said it is also working on ways to address concentration risks and the difficulty of enforcing rules on overseas entities.
In a webinar organised by the Reit Association of Singapore (Reitas) for IDs, SGX RegCo's CEO Tan Boon Gin said Reits must do all they can to boost investors' confidence in the independence of directors. This might include allowing unitholders to vote on the election of IDs, which some Reits already do.
Where IDs sitting on Reit boards have been elected by sponsors rather than by unitholders, Mr Tan said, there are "perceived conflicts of interests".
Such perceptions are at odds with the purpose of IDs, which is to "give confidence to unitholders that their interests are being protected".
Mr Tan also said Reits should address doubts over the independence of directors "squarely, rather than falling back on meeting the technical definition of an ID".
Said Mr Tan: "Reits must be prepared to dive into details and provide the transparency to address the concerns raised head-on.
"Once this has been done, Reits should then draw a line under it, and move on to focus the minds of unitholders on the merits of the real issues at hand and stop questions of independence from being a distraction."
In his speech, Mr Tan also highlighted issues that have arisen from the growing geographical diversity of SGX-listed Reits.
Given the "growing interest" to list Reits here that have international assets, he said there is a "pressing need" for the industry to raise its standards.
Meanwhile, the Reits that began with largely Singapore assets to their name have begun to look overseas in an attempt to ensure continued growth.
Larger Reits can benefit from economies of scale and are more likely to be added to global Reit indices, which will boost a Reit's international and institutional unitholder base.
But there are challenges to valuing overseas properties, Mr Tan noted. "Each market has its own specific laws and requirements on property valuation."
He therefore recommended that IDs check that the property valuers they engage have the "appropriate qualifications and experience in the relevant market", and that valuations adhere to the relevant requirements.
On the impact of the Covid-19 pandemic, Mr Tan noted that the hospitality sectors in countries with high infection rates have been significantly impacted even as local players have enjoyed the benefits of government quarantine programmes.
Risks for unitholders of hospitality Reits with overseas assets are aggravated by concentration risk: it is common for a hospitality Reit's sponsor to be the master lessee of all the hotel properties in the portfolio.
The traditional way of managing such concentration risk - to require a higher security deposit that can be drawn down upon occasion of default - runs into enforcement complications if the Reit's assets are overseas.
Mr Tan said possible ways to sidestep this issue could include a better ring-fencing of security deposits, additional legal due diligence, and requiring a legal opinion to confirm the enforceability of security deposits to be disclosed in the prospectus.
Some other solutions for the concentration risk issue could include capping the number of properties that can be leased to a sponsor, tightening the criteria for master lessees, and requiring master lessees to provide comprehensive disclosures on their financials in the IPO prospectus.
He added, however, that he was "canvassing the universe of possible solutions". SGX RegCo will work "very closely" with the industry to find the best solution.
Mr Tan also said SGX RegCo would announce responses to its consultation on enhancements to the property valuation regime early next year. This relates to valuations for mergers and acquisitions, and how to ensure that such valuations are objective.
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