Real Estate Investment Trusts In Malaysia
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REAL ESTATE INVESTMENT TRUSTS IN MALAYSIA
KATHERINE NG*
[This paper aims to give readers an insight into the structure and operation of a Real Estate Investment Trust (�REIT’) in Malaysia. In doing so, this paper will adopt a product-level approach in its analysis of the Malaysian REIT, in conformance with the overall objectives of the Capital Market Masterplan. Firstly, the legal design of a REIT will be described. Next, a brief overview of the Malaysian capital market and its current regulatory environment will be provided. The regulation of a Malaysian REIT under the Securities Commission will then be examined and applied using a case study on the Starhill REIT. Finally, the regulatory frameworks governing REIT regulation in Malaysia and Singapore will be evaluated based on corporate governance issues raised by the Starhill REIT case study.]
CONTENTS
I INTRODUCTION
Part I puts this paper’s focus on Real Estate Investment Trusts (�REITs’) into context by providing a brief introduction to the environment of the Malaysian capital market.
Malaysia is a success story of an emerging market economy.2 Malaysia’s rapidly growing capital market emerged as a significant source of funding for increased investment since the early 1980s.3 Its development was spurred by measures to broaden and deepen the market, which improved capital market regulation.4 After the Asian crisis hit in 1997, Malaysia’s recovery process in 1999-2000 was among the strongest of its peer economies.5
In 2001, the Securities Commission (�SC’) released the Capital Market Masterplan,6 the official blueprint charting the development of the Malaysian capital market.7 The 152 recommendations in this document will be implemented in 3 phases over a 10 year period.8 As of 31 December 2005, 99 recommendations (65%) have been implemented based on Phase 2 of the CMP, which focuses on liberalizing market access and strengthening key market sectors.9
REITs have only been around in Asia for the past 5 years, but it has been hailed to be “the hottest new asset class in Asia”.10 Driven by market demand, Asian securities market regulators are actively promulgating new guidelines to attract further REIT investment in their respective capital markets.11 Malaysia is no exception. On 3 January 2005, the Securities Commission released the Guidelines on Real Estate Investment Trusts (вЂ?REIT Guidelines’), in line with Phase 2 of the Capital Market Masterplan.12 The REIT Guidelines aim to, inter alia, increase transparency for investors, improve flexibility on acquisitions of leasehold properties, and increase efficiency in listing a REIT.13
Part II of this paper will describe the legal structure of a Malaysian REIT (which is similar to a unit trust). Part III provides an overview of the regulatory framework in Malaysia governing REITs. In Part IV, this paper will use the Starhill REIT as a case study to examine how the REIT Guidelines operate in a practical context. The paper will primarily consult, inter alia, the Starhill Prospectus and Starhill REIT Annual Report for purposes of this case study. Part V aims to provide a comparative analysis on the corporate governance regulation of REITs between Malaysia and Singapore, based on the specific issues raised in the Starhill REIT case study.
II THE LEGAL STRUCTURE OF A MALAYSIAN REIT
A real estate investment trust (REIT) is defined by the REIT Guidelines as
an investment trust investment vehicle that invests or proposes to invest at least 50% of its total assets in real estate, [which] may be by way of direct ownership or a shareholding in a single-purpose company whose principal assets comprise real estate.14
The structure of a Malaysian REIT is not complicated. In fact, its structure is similar to that of a unit trust, as illustrated in the diagram below:15
Like the unit trust, a REIT is a tripartite relationship which involves the trustee, the management company, and the unit holders.16 This relationship is legally bound by a trust deed.17 The trust deed is a formal document forming the constitution of the REIT.18 The deed is prepared by the management company and is registered with the SC.19 Similarly, provisions stipulated in the Guidelines on Unit Trust Funds on the required content in a unit trust deed also applies to a trust deed of a REIT submitted to the SC.20 Basically, the Trust Deed describes the terms and conditions governing the day-to-day operations and management of the REIT, sets out the covenanted responsibilities of the manager and trustee of the REIT, as well as the rights and liabilities of the unit holders.21 In addition, the trust deed may be modified according to the parties’ intentions, subject to the approval of the SC.22
The duty of the trustee is to safeguard the interests of the unit holders and monitor the administration of the fund by the management company.23 The management company administers and manages the REIT.24
Technically, REIT investors are known as �unit holders’ instead of shareholders because they receive units in exchange for the cash.25 Units and shares are strikingly similar;26 units are a form of property themselves.27 The REIT is a contractual vehicle used to pool investors’ capital for collective investment in the REIT.28 This contractual use of the REIT infers that the rights of the investors are contractual.29 Ordinarily, the trust deed confers in the unit holder a right in money, being a realizable proportion of the net value of the REIT fund.30 A unit holder would have no right in the assets of the REIT.31 Although unit holders are passive in general, they can make binding decisions upon the trustee and the management company.32 In addition, the capital character of a REIT fund is reflected in accounting treatment,33 as the investment of unit holders are used to generate gain.34 Invariably, provisions for annual meetings and reporting requirements are provided in the trust deed and regulations.35 A majority vote of not less than two-thirds of all unit holders is required in replacing an auditor, deed modifications, and to make any other material changes in the investment objectives of the REIT.36
The structure of a REIT provides