2023.04 The Taiwan Banker NO.160 / By Su Weihua
REIT amendment reflects the experiences of Singapore, JapanBanker's Digest
In order to diversify investment options, enhance the competitiveness of Taiwan’s asset management industry, and activate the domestic real estate securitization market, the Financial Supervisory Commission (FSC) has promoted an amendment of the Securities Investment Trust and Advisory Law, which most notably allows real estate investment trusts (REITs) to be structured as funds. Before the amendment, they were structured as trusts, which had many restrictions on flexibility and management. The new system also features higher transparency and stronger regulation. This will inject new vitality into the capital market, assist in industry financing and development, and improve Taiwan's infrastructure through investments in logistics, warehousing, data centers, long-term care parks, social housing, wind power, and solar power plants. Three factors preventing expansion of REIT funds The 2003 Real Estate Securitization Act allowed REITs to adopt a trust structure, with banks as the main issuers. However, the insufficiently flexible framework inhibited development, so the number and scale of REITS lagged that in neighboring Japan, Singapore and Hong Kong. Liang & Partners Law Offices, which has studied this law for many years, said that there were three major factors preventing expansion of domestic REITs funds: unclear division of powers and responsibilities between the trustee institution and real estate management agency, overly strict regulations on investment targets, and long review time. The first is the power-responsibility relationship between the entrustment institution and the property management agency, giving the former responsibilities but not rights. The main core of Taiwanese REITs is the trustee institution, that is, the issuer. These institutions must be in the trust industry, but in Taiwan, only banks are in the trust industry. After the bank applies to the Banking Bureau of the FSC for approval, it raises funds from investors to purchase the property. However, banks may not be good at real estate investment and management, so the Act allows them to contractually appoint management agencies to purchase and manage the property, who are usually construction companies or developers. Put simply, the Banking Bureau supervises the banks, while the rights and obligations between them and the property management companies are regulated contractually. Under the original framework, the Banking Bureau could not control the property manager. The mismatched powers and responsibilities between the bank and manager were unfavorable to the development of products and the overall market, which was why the FSC is now studying and modifying the current practice. Second, past regulations on REITs investment targets were too strict. Research showed that it was difficult for smaller REITs to change investment targets, and they were illiquid. Over time, Taiwan's REIT market became chilly. Although regulations later allowed additional applications, no one has applied so far. The key point is that additional applications require amendments to the trust contract, and a beneficiary meeting must be held, which is quite difficult in practice. Finally, the review schedule is too long. If a bank wants to issue a REIT, it must first report the securitization structure to the Banking Bureau, and then gain the approval of the Taiwan Stock Exchange, Taipei Exchange, Ministry of the Interior, and other parties for various purposes. After the review is completed, the REIT is approved by the Banking Bureau for final approval. In practice, the entire process takes 8-9 months or more, which is unfavorable for time-sensitive fund operations. Various other steps, such as selection of investment targets, must be also reviewed by regulators. When a target is changed, added, or dropped, a beneficiary meeting must also be held. In order to invest in overseas real estate, not only must documents be submitted to regulators for review, but also a local lawyer’s opinion, accountant's opinion, and evaluation report issued. The entire process is quite lengthy, resulting in a lack of interest on the part of investors and sellers. Japan’s and Singapore’s experiences are worthy of study Analyzing the current situation in Asia, the largest REIT market is Japan, and the second largest is Singapore. Both hold lessons for Taiwan. Singapore’s qualifications for property management institutions are very strict, stipulating that their shareholders and CEOs must have real estate management background. This mechanism makes the managers highly professional, so there is less need to regulate the investment itself. Japan, for its part, focuses more on investment disclosures. Both countries allow more room for flexibility in the design of REITs products. Because the pursuit of a stable rate of return is a common goal, the management agencies naturally prioritize investor interests. In order to invest in overseas real estate, it is important to be highly familiar with the local market. Japanese REITs invest in the US indirectly. Japan’s Financial Services Agency stipulates that they investing must invest in the US through special purpose vehicles (SPVs), so as not to affect their overall assets and investors’ rights in the event of US litigation. Some do not directly invest in overseas real estate, but in other foreign REITs. In fact, the rate of return of foreign REITs is quite high, compared to only about 2.5%-3% in Taiwan, over 4% in Japan, and 6%-8% in Singapore, and foreign investors do not need to withhold tax. However, REITs lack large cash sources and must borrow money in order to invest in overseas REITs. Article 19 of the Real Estate Securitization Act stipulates that borrowing is limited to acquisition or development of real estate or related rights, excluding acquisition of securities. If this requirement is not loosened, it will be difficult for Taiwanese REITs to invest heavily in foreign REITs. Singapore, in contrast, in is completely neutral between domestic and foreign investments. This is mainly because the domestic REIT market is not large, so more than 80% of REIT funds have invested overseas, with diverse investment targets. As long as the investment meets the legal and regulatory requirements in the destination country, the regulator mainly considers the remaining lease period and lease profile, etc. The management only includes general specifications, mainly supervised through real estate management agencies, professional teams, or internal control mechanisms. Japan and Singapore clearly define powers and responsibilities, preventing dilemmas such as responsibilities without powers, low yields, and low investor interest. New vitality in capital markets Referring to the real estate investment trust systems in Japan, Singapore and Hong Kong, in order to activate Taiwan’s real estate securitization market, the FSC decided to allow REITs to adopt a fund structure. Issuers will now be allowed to raise and privately place REITs funds in parallel with the current trust structure. It has been exactly 20 years since Taiwan allowed REITs. Over that time, during the peak period of REIT fund development, there have only been 10 cases. The small scale and low liquidity of the domestic REIT market, frequent controversies and liquidations, and lack of understanding by investors have all hindered development of REIT funds. Investors are unfamiliar with REITs, and often think that investing in real estate is risky. The concept of REITs in other countries is to rent out real estate and distribute the rental income to investors, so that those who cannot afford their own property can still invest in real estate. Taking Japan REITs as an example, the mentality of investors is to treat it as a medium-to-long-term investment tool, not for short-term returns. Real estate investment trust companies can now act as management agencies. Professional property maintenance and management will not only improve urban design, but also allow banks to perform their wealth storage and supervision responsibilities, which will help activate capital, improve economic efficiency, and further expand the domestic REIT market.