The challenge of uniformity

There are significant variations in the standards of governance of listed real estate across Asia. Family ownership is among the challenges facing regulators and industry bodies. Kristen Paech reports

If Australia is regarded as the corporate governance benchmark to which Asia aspires, then recent months have presented a skewed picture of the state of play in Australian listed real estate companies.

The implosion of Centro Properties, the Australian retail property group, has raised questions about the adequacy of disclosure requirements for listed companies, and left open the possibility of a class action lawsuit.
Separately, the Australian Securities and Investments Commission (ASIC) and Australian Stock Exchange (ASX) are investigating concerns that some individuals were deliberately spreading false information about listed securities to drive down market prices, and possibly trading on inside information.

And, last but not least, a recent report by Regnan - the governance research and engagement service owned by eight Australian institutional investors - found declining governance standards for director and executive share trading at many of Australia's largest listed companies, some of which operate in the real estate sector.

The first quarter of 2008 has undoubtedly been one of the toughest for the listed property trust (LPT) or real estate investment trust (REIT) sector for many years.

But it is difficult to tell whether the issues that led to the blow-up of Centro, which experienced burgeoning debts, complex structures and was exposed to property markets which suffered big valuation falls, were specific to the company, or rather reflective of wider flaws within governance of the listed real estate sector.

"Part of the reason why we had this episode with Centro was they don't have to disclose anything before they officially release it to the market, and there was really no sign whatsoever before the whole thing collapsed," says Frankie Lee, co-head of property equities Asia at Henderson Global Investors in Singapore.

"That makes the marketplace fair, but sometimes it makes it difficult for investment managers like us to act ahead of changes in the market."

Michael Smith, group company secretary at  Mirvac Group, the ASX-listed integrated real estate group with more than A$27.8bn (€16.7bn) of assets under management across the real estate funds management and development spectrum, is adamant there is no need for tightening of Australian disclosure requirements on the back of the collapse.

"The issues with Centro were really specific to that business," he says.

"[Centro] had grown very quickly, the day of reckoning was never going to happen in their eyes, they had borrowed a lot and with declining assets in the US they became very exposed to interest rate movements and the illiquidity in the debt markets. No one in Australia foresaw that happening as quickly as it did and they were caught out, so it's probably a management issue rather than a governance or disclosure issue per se."

Nonetheless, the credit squeeze and its high profile victims have arguably tarnished Australia's reputation as the global leader in governance standards.

"One cannot assume that Australia has a superior disclosure centre or superior director behaviour," says Lee.

"I'm not suggesting there's merit behind the litigation [against Centro] and I'm not suggesting the company will lose, but we now have a revelation that in some areas disclosure needs to be improved, and Australia is no exception."

Australia has built its reputation as the global benchmark setter for reporting standards in listed real estate over many years.

General Property Trust - introduced in 1971 - was the first LPT on the Australian stock exchanges, which were merged in 1987 to form ASX.

LPTs have since been re-branded as A-REITs as part of efforts by ASX and the Property Council of Australia to better align the name with those in other jurisdictions, including the US.

This extensive history in the REIT sector is in stark contrast to Asia, where the first REIT did not emerge until 2001.

Japan led the way with the launch of two J-REITs in September 2001, followed by Singapore, which launched its inaugural S-REIT in July 2002.

After initial legal difficulties, Hong Kong launched the Link REIT in November 2005 and broke new ground in doing so - at US$2.6bn (€1.67bn) it was the largest REIT IPO in the world.

Australia's long-established presence in the REIT sector has enabled it to iron out many creases that Asia is still grappling with, although the more mature Asian markets such as Singapore and Hong Kong have made huge leaps forward.

Peter Mitchell, chief executive at the Asian Public Real Estate Association (APREA), says regulation of directors' conduct is moving in tandem with developments in countries such as Australia and the US.

"Corporate governance standards in Hong Kong and Singapore are very high," he says.

"We're seeing a greater degree of parallel development because the borders are breaking down now with regard to the transaction business. There is a reasonable degree of commonality in the approach of regulators in Asia, certainly in the mature markets of Asia, but in other markets as well."

But Mitchell believes it is important to distinguish between REITs and other listed property vehicles, as regulation varies.

"In all three countries [Singapore, Hong Kong and Japan] there are actually higher standards of disclosure and reporting requirements imposed on listed REITs in Asia as opposed to other listed vehicles," he says.

"REITs are regulated in Japan, Hong Kong and Singapore outside the general regulation of companies, so REITs in those countries are subject to a lot of restrictions that don't apply in Australia, such as what they can and can't invest in, how much they can borrow, the extent to which, if at all, they can get involved in development activities.

REITs as a specific investment class in those countries are subject to higher levels of scrutiny and regulatory observation than other listed companies."

Despite recent events, which are by no means limited to the Australian listed real estate market, Australian investment professionals maintain corporate governance standards in Australia remain top notch.

"I think Australia would be held up as where [Asia] would be aspiring to get to," Smith says.

"Quite often other Asian regimes come and look at what ASIC and ASX are doing here and how they monitor and regulate business activity. Certainly the Singapore Stock Exchange is closely aligned to the Australian exchange, and I know that Thailand has been out here looking at our system, so they are looking at Australia as a model that they can build on."

Stephen Tunley, chief executive officer at Mirvac Aqua agrees: "Australia has the best standards internationally. In the areas [of Asia] where most of the money is invested, namely mainland China, corporate governance is non-existent and Japan, which is a very sophisticated market, has a lot of problems with governance. This is evidenced in the banking sector where they have gone through a prolonged and painful recession."

Corporate governance standards in Japan have improved significantly over the past two years. In June 2006 the Tokyo Stock Exchange (TSE) introduced a requirement for every listed company to prepare a report on corporate governance, publicly available on the TSE website.

The exchange has also attempted to analyse the conditions of corporate governance within TSE-listed companies on the basis of the data available in the reports, conducting a survey on a bi-yearly basis.

However, in its 2007 white paper on corporate governance, the TSE admitted that only 60-70% of the targeted companies responded, so it could not accurately understand the actual implementation of corporate governance by TSE-listed companies.

The white paper was hence its first real attempt to analyse the data, and revealed transparency has grown to be an important concept for management.

Some 68.8% of companies described ‘transparency' as a central issue of corporate management as a whole. Almost half (48.2%) described ‘corporate value' as the fundamental policy in relation to the corporate efforts to implement corporate governance and as the purpose of corporate governance.

Hiroshi Minami, senior analyst at Innovest Strategic Value Advisors, says while Japanese real estate companies have a high level of transparency in their reporting the language barrier can cause difficulties for foreign pension funds.

"In Japan, REITs have a fair amount of disclosure but non-Japanese investors cannot access this information so that can make it hard for Japanese REITs to attract foreign investors," he says.

Amy-Lyn Hall, also a senior analyst at Innovest, says this is less of an issue in Hong Kong, where foreign institutional investors are demanding higher transparency from the companies in which they are investing.

Australian investors bought A$22bn of overseas real estate in 2007, with investment in the Asia-Pacific region almost tripling to $5bn, according to a report by London-based property adviser DTZ.

"One Hong Kong REIT - the Link Real Estate Investment Trust - has a high percentage of foreign investment," Hall says.

"Deutsche Bank and Children's Fund are big investors… to that degree I'm finding that some of the western ideas of transparency come out a little bit because the investors are demanding it. So as you get more foreign investment in [Asian real estate] you're going to have companies demanding higher transparency, and these companies are doing amazingly financially so investments will increase."

Efforts by APREA are also likely to increase transparency and improve reporting standards in listed real estate companies across Asia.

The association's best practices group is considering a range of accounting and financial reporting issues in a bid to achieve best practice standards across the region.
"We're working towards uniformity given that listed real estate is a global industry these days and real estate is both global and local," Mitchell says.

"The more that there is a consistent uniform approach to accounting and financial reporting for listed real estate vehicles globally, the more confidence and familiarity investors will have going into different markets."

One variable that will not be addressed under the best practice standards, however, is the family ties evident within many listed real estate companies, particularly in Hong Kong.

Lee says in Hong Kong, the founding families control up to 70% of many of the companies, making board representation difficult for institutional shareholders.

"The best you can do as an institutional investor is to give the management opinions about the operations and how they could improve them," he says.

"Whether they implement this advice from the outside is up to them."
The history of family ownership dates back decades in Hong Kong, where families were successful in setting up some of today's large cap companies, such as Cheung Kong, Sun Hung Kai and Henderson Land.

"The big companies in Singapore were founded by the offshoots of government and arguably after they went public they continued to diversify their shareholdings, so a lot of the holding companies are in fact quite institutionalised," Lee says.

"There's no one person or family that has control over the companies [in Singapore], whereas in Hong Kong a lot of [families] entered into different businesses and real estate happened to be one area where they made a large fortune. They are still good at running real estate businesses, so after many years they still don't need to have a lot of fundraising, so they haven't diluted their shareholdings much."
This can expose the company to the risk of conflicts of interest. However, Lee says the situation is closely regulated.

"Sometimes you encounter asset transactions that involve asset sales between the parent company and the subsidiaries, but there are clear rules from the stock exchange and upon the sale of a certain percentage of the assets of the company you need to hold an extraordinary general meeting to obtain approval from the shareholders," he explains.

"In many cases, the controlling shareholders cannot vote in the meeting."
On the REITs front there is no doubt that the markets of Hong Kong, Singapore and Japan are still undergoing a period of maturation.

The Hong Kong Stock Exchange only recently allowed REITs to buy back their own shares, for example, which is a major advantage in times like recent months where the equity market sell-off was quite indiscriminate.

Going forward, Lee says companies and REITs in Asia need to open up to more competitive disclosure and look across the whole Asia-Pacific region, rather than within their own country, to drive developments.

"Since we've seen the development of equity markets in Asia for several decades now and the world is getting smaller, these companies should start to look around and compare who are the better ones with regards to disclosure and meeting with investors," he says.

"In today's environment, if you maintain the status quo you'll be left behind."