ASIA - The CFA Institute, a global association for investment professionals, has called for improvements in governance structures of real estate investment trusts (REITs) in Asia Pacific.
The CFA Institute has published a report that calls for changes to structures to protect investors and minimise conflicts of interest between external management and REIT unit-holders.
Lee Kha Loon, head of standards and financial market integrity for Asia Pacific, said: "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."
The report - 'Asia‐Pacific REITs: Building Trust through Better REIT Governance' - reviews governance practices 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.
The report cites case studies that demonstrate weaknesses in current governance practices and the effect on REIT unit-holders.
These include limiting the potential for acquisition of a REIT at favourable prices because of conflicted interests of the dominant unit-holder, as well as REIT fee structures that reward growth in assets at the expense of value creation.
Others highlight the manager entrenchment and the potential conflicts from related party transactions among various interests associated with a REIT.
The report's proposed changes are made in the context of existing regulatory structures in the region.
The research also proposes a model governance structure for REITs.
For example, management should be internally managed rather than outsourced, while an independent board of directors should be subject to election and removal by unit-holders.
Further, annual general meetings for REITs should afford unit-holders the opportunity to meet and query REIT management, and there should be approval by independent unit-holders of related party transactions.
Another proposal was to have a limit on majority unit-holder positions of 50% of the issued units, to better align interests and preserve minority unit-holder tax pass‐through benefits.
"Given the infancy of some REIT markets in Asia and the potential for growth in new markets, better governance will help in long-term value creation for the investor," said Lee.