The call for reform in Singapore’s real estate investment trusts (Reits) market has taken on fresh urgency, as concerns resurface regarding the potential conflict of interest when Reits purchase assets from their sponsors.
According to The Business Times, this comes after the Monetary Authority of Singapore (MAS) announced last week that it may provide more regulatory guidance to the industry and asked boards not to take “an overly technical approach” in following governance rules.
This will likely bring greater impact on the manager/trustee model and fee structure that Reits operate under.
Reits in Singapore and Hong Kong use the manager/trustee model, which has the Reit manager appointed by the sponsor of the property trust. The directors of the Reit manager are also appointed by the sponsor.
The managers take charge of the Reits and are paid according to the size of the portfolio they are taking care of.
“The conflict of interest can be avoided if the sponsor appoints a Reit manager that is not related to the sponsor or its group of companies,” said Lee Kha Loon, Head of the Standards and Financial Market Integrity Division of CFA Institute for the Asia Pacific region.
He added that the alternative is to use a corporation model that has investors voting for the director’s appointment including independent directors — a more common practice in Australia.
Meanwhile, Business Times reader Bobby Jayaraman wrote that Reit managers should be paid based on a combination of growth in distribution per unit and a Reit’s market valuation.
He believes the current rules are not strong enough to “prevent unscrupulous Reit’s from taking advantage of minority shareholders”.
“The major culprit is the incentive system for Reits, which does not always align with shareholder interests,” he added.
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