The global financial crisis is putting the Asian real estate industry under unparalleled strain. But the crisis could ultimately result in a strengthening of governance and transparency in the region. Kristen Paech reports

Financial market turmoil is hurting public real estate markets across Asia, but it could have the unintended consequence of accelerating improvements in corporate governance standards. If history is any indication, the crisis will have a beneficial impact on governance, driving forward regulation in the region.

This is the view of Peter Mitchell, chief executive of the Asian Public Real Estate Association (APREA). He points to the response in the US after the savings and loans crisis in the early 1990s, and in Australia after the property crash and collapse of the unlisted funds market in the 1980-90s. "In each of those cases the response of governments was to review and take note of what had happened and why," he says.

"They, in some cases, strengthened [regulation] and, in other cases, established new regulation, so that led, in the case of Australia and the US, to the so-called modern era of their REITs. It's really since those market crises that their REIT markets started to flourish, after which most of the growth occurred."

The Singapore REITs market did not take off until 2002 with the launch of CapitaMall Trust (CMT). However, interest was first sparked in 1986, when the property market was suffering following its first post-independent economic recession.

That market has been "hugely successful" despite the current downturn, Mitchell notes. "The regulators in all countries - Singapore, Japan, Australia - are currently undergoing a review to see how things can be strengthened, so I'm sure we'll come out of this with improved regulation of public markets," he says.

APREA's draft best practices handbook is due to be rolled out to the association's broader membership in the coming weeks, and the association intends to publish the first edition in two to three months' time. The handbook covers accounting and financial reporting standards in the listed markets, and aims to achieve more uniform valuation standards in Asia.

Recently, the association broadened its remit to include governance of the unlisted sector, and Mitchell says a committee has been formed to come up with a mission and objectives for 2009 and beyond. "We've just finalised a review of our management and working committee structure to incorporate a separate agenda for the unlisted sector, and that includes a special best practices group focusing on listed funds and things such as governance," he says.

One of the tasks of the committee is to compare governance standards in the listed and unlisted markets. The listed sector is typically considered more transparent than the unlisted sector due to the reporting requirements of REITs in many Asian countries, particularly Australia. However, pension funds continue to push for higher standards of disclosure.

Jones Lang LaSalle's (JLL) Global Transparency Index 2008, which covers the commercial real estate markets, revealed Asia Pacific fared worse than Europe in all categories, with the exception of listed vehicles.

The growth of the REIT sector has improved financial disclosure across the region, and the processes surrounding compulsory acquisition of real estate by the public sector have become more transparent over the last two years, JLL notes.

Jennifer Johnstone-Kaiser, head of real estate research, Asia Pacific, at Mercer, says there is still a lot of room for improvement in the listed real estate market. "From our discussions with property securities fund managers, they still believe there's a fair amount of opaqueness in the listed market as well," she says.

This lack of transparency became evident in China this year, with the government launching investigations into transactions involving two local listed companies.

"Ideally in a developed market, these companies would announce a trading halt and make a formal announcement to clarify whether the rumour is true, or clarify any concerns that investors may have. But most of them failed to do that and after a while the share price really did take a plunge when the newspapers unveiled more details," says Frankie Lee, co-head of property equities Asia at Henderson Global Investors.

"The key thing for us to learn is that China is such a big country, and for journalists to understand all the issues on a timely basis is a very challenging task. Most of the companies listed in Hong Kong have a close following by most investors and journalists.

Right now the coverage is quite good and very detailed, but as China becomes a bigger part of the global economy, there'll be even further requirements for financial reporting."

APREA has been working for some time to encourage more uniform valuation standards for real estate companies across the Asia region.  The association is in alliance with sister organisations, such as the National Association of Real Estate Investment Trusts (NAREIT) and the European Public Real Estate Association (EPRA), which are working at providing a unified response to exposure drafts issued by the Financial Accounting Standards Board (FASB) in the US and the International Accounting Standards Board (IASB) in London.

It has also made a number of submissions to regulators in Singapore and Japan, with a view to improve what Mitchell describes in Singapore's case as, "very robust legislation" already.

In Japan, and to a degree in Singapore, Mitchell says there has been concern about how mergers and acquisition and privatisation laws apply to REITs. He expects that legal changes will improve clarity of takeovers and listings for Japanese REITs. "It's a combination of clarification on the application of the rules, but also dealing with some very negative tax consequences that exist at the moment," he says.

Other governance changes are afoot in Singapore, with the Monetary Authority of Singapore (MAS) announcing in February that it would consult REITs managers on the need to hold AGMs.

Senior minister of state for finance and transport Lim Hwee Hua says the move would bring Singaporean REITs in line with practices for other listed vehicles and would ensure better corporate governance.

APREA has thrown its support behind the initiative, with Mitchell stating that REITs should not be different to other listed entities. "In Singapore our view is: why should REITs not be required to hold AGMs when listed companies must?" he says. "It's a platform for shareholders to express their views on management and express concerns."

Johnstone-Kaiser says Mercer would like to see the Australian model adopted by other Asian REITs, where company earnings are announced on a regular basis.

When researching real estate companies in Asia, she says the investment consultant looks at a range of corporate governance indicators. "We look at the composition of the board - we want as far as possible to know that there are majority independent directors on the board - and a number of other checks and balances, such as risk management committees, compliance committees.

"We want to ensure that all of these various groups… should there be any breaches or potential breaches, that these are transparent and [the findings are] revealed to us when they are questioned about issues."

When assessing the fund managers themselves, sponsor risk and joint venture partner risk are increasingly key issues for pension funds to consider, she adds.

"Each crisis brings with it new issues, and there seems to be a concern that there are a number of risks related to, for example, a fund manager that does development in a particular Asian country, whether the right protocols are in place with the JV partners in that country, and whether they'll be around to deliver the opportunities that the fund is intending to invest in," she says.

"It's a concern about longevity, and having the reputation, the experience and the track record to deliver the particular investment strategy."

Even some of the markets known to uphold the highest standards of corporate governance, such as Singapore and Australia, have shown that during this financial crisis there is no such thing as too much transparency.

Lee believes Hong Kong real estate companies have shone out as the most transparent among their Asian peers. "This time round, the Hong Kong companies have had the best transparency," he says.

"The issues I found among Singaporean, Japanese and Australian companies is they have had difficulty in getting some of the refinancing done. Some of the companies have been reluctant to acknowledge the issue early on, so they have been quite late in coming to the market for new equity.

"I put that as a strike against the corporate governance market, whereas the Hong Kong companies have been less active in the last cycle in leveraging up and using off-balance-sheet vehicles. There have been multiple crises in the Hong Kong property market in the last 15 years so the market has been fully transparent. Property is still a key sector in Hong Kong, so it's being monitored very closely, and banks have a high exposure to local construction and also mortgage loans."