CFA Institute, the global association of investment professionals, has called for changes in the governance of Real Estate Investment Trusts (REITs) structures to protect investors and minimise conflicts of interest between external management and REIT unit-holders.

The report reviewed the governance practice 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.

Conflicting interest

CFA said REIT sponsors, managers, and unit-holders often have different and occasionally conflicting interests, therefore, structural reforms were called for to protect investor interests.

Mr Lee Kha Loon, head of standards and financial market integrity, Asia Pacific, at CFA Institute, 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.”

Recommendations include REIT management to be internally managed rather than outsourced, an independent board of directors subject to election and removal by unit-holders, annual general meetings for REITs to afford unit-holders an opportunity to meet and query REIT management approval by independent unit-holders of related party transactions and a limit on majority unit-holder positions of 50 per cent of the issued units.

Case studies cited demonstrate weaknesses of current governance practices and the effect on REIT unit-holders, including limiting the potential for acquisition of a REIT at favourable prices because of conflicted interests of the dominant unit-holder.

“Given the infancy of some REIT markets in Asia and the potential for growth in new markets, we believe better governance will help in long term value creation for the investor,” Mr Lee said.

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