Call to run Reits as companies, not trusts

TWO lawyers argue in a new article that real estate investment trusts (Reits) in Singapore could better protect creditors and unitholders if they were corporatised instead of operating as trusts.

They question the current relevance of trust structures and point to Britain and the United States, which have shaped Reits to run along company law principles.

Reits are investment instruments listed on the Singapore Exchange that allow small investors a relatively cheap way to invest in property. They typically own properties of a particular type, such as shopping malls or medical facilities, and earn income from rent. Unitholders receive regular payouts similar to dividends.

Ms Lee Suet Fern and Ms Linda Foo, writing in a special issue of the Singapore Academy of Law Journal published last week, suggest the current trust framework underpinning

Reits here may not be suitable in future. Ms Lee is senior director of Stamford Law, where Ms Foo also works.

They argue that a corporate structure would also cut the liability for unitholders in the event of insolvency, compared with the trust structure.

In Reits, corporate taxes are minimised if most taxable income is distributed to unitholders. This makes Reits a high-dividend yield play relative to other asset classes such as shares or property unit trusts, said an industry source.

As of last October, 21 property-related investment trusts with a market value of about $26 billion were listed here. In making out the case for corporatisation, the authors point to the US practice in which more than 70 per cent of Reits are constituted as state law corporations.

British policymakers also mandated the corporate form for Reits and eschewed the unit trust option entirely.

In contrast, Reits here are organised mainly as unit trusts, a form of collective investment scheme. But among other things, Reits in Singapore are administered by trustees as well as managers, with each bearing different roles and requirements.

A corporate form would remove this division of roles and the potential overlaps and conflicts from ‘multiple masters’. It would also better protect creditors in the event of an insolvency of a Reit or its trust.

The authors argue that the regulation of Reits here shares many features with that of companies. They concede there may be a serious tax disincentive in transforming Reits into companies, but point to the examples of the US, Britain and Australia where ‘the governance of Reits may be aligned with company law principles without withdrawing tax transparency’.

‘Ultimately the authorities will have to discern the appropriate balance between market development and the protection of investors and creditors,’ they wrote.

Industry sources said the article is timely as the global credit crunch last year showed up difficulties for Reits, and corporatisation held potential benefits.

Financial adviser Roy Varghese said that in a unit trust, the manager picks the securities and the trustee has specific legal duties outside of investment management.

‘Within a Reit, the lines can be blurred. The unitholder of a Reit will be better served if there is no potential conflict of interest or overlapping of functions,’ he said.

‘It also makes sense that corporatising the structure will help in injecting cash flow in the operations of the real estate fund, given that Reits are viewed as a source of passive income for unitholders.’

Source: Straits Times, 9 Feb 2010