Investing in Australian real estate investment trusts

Australia has one of the largest, most sophisticated and transparent real estate investment trust (REIT) markets in the world, with more than 80% of institutional grade real estate in the country securitized. Australia’s first listed REIT was established in 1971 and real estate funds now extend across most real estate classes.

The legal and regulatory framework for the REIT market is investor-focused and investor-friendly. The framework has allowed flexible investment structures and supports the raising of equity through rigorous disclosure, licensing and registration requirements, all of which are designed to promote transparency and investor confidence.

The framework is also responsive to cross-border investment. The REITs listed on the Australian Securities Exchange (ASX) include a number of funds with substantially or exclusively offshore assets (such as those focused solely on US, European or Japanese assets).

The main legal vehicle used for both listed and unlisted REITs in Australia is the trust. The law of trusts provides a comprehensive set of core principles governing the relationship between trustees (in this case as the holders of the fund), the investors (as beneficiaries) and the fund assets. Issues in that relationship include:

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  who owns the assets and what kind of real estate interests they have;

• the powers of the trustee to deal with the assets, to borrow and generally to manage the fund;
• the kinds of securities that the trustee can issue (i.e. units in the trust);
• the fiduciary duties owed by the trustee to the investors (i.e. the unit holders);
• the tax treatment of the revenue, gains and losses derived from or incurred in relation to the assets;
• the rights and remedies of unit holders on a continuing basis and on the closing of the fund; and
• the liabilities of unit holders.

Managed investment schemes such as REITs are also subject to the provisions in the Corporations Act concerning takeovers and related party transactions. As listed entities, REITs are also subject to the rules of the ASX.

Aside from the general trust law aspects, special features which distinguish Australia’s REITs from REITs in other jurisdictions include:

• having an external manager to provide trustee and fund management services for shareholders. (This structure has been somewhat modified recently with the shares of the manager and units in the REIT both being listed and traded on the ASX as if they were a single entity.)；
• the impact of Australian takeovers law on the terms of underlying co-ownership and asset management agreements; and
• the impact of tax and stamp duty on the structure and activities of funds.

Transparency and confidence

In Australia the reliance of the REIT market on equity financing requires a high level of investor confidence as it involves the pooling of money for investment in a scheme in which the members of the scheme do not have day-to-day control over the operation of the scheme. This is promoted through the regulation of REITs as managed investment schemes and by the high level of transparency provided by the regulatory regime.

REITs are required to be registered, to have a responsible entity to manage the fund, to issue a product disclosure statement when interests in the REIT are offered for investment, and to comply with the continuing management and disclosure requirements applying to managed investment schemes.

Takeovers, reconstructions

Over the last few years there has been consolidation in the REIT sector in Australia, giving rise to both friendly and hostile takeover bids, and more recently, to reconstruction and recapitalization activity.

There are three main legal techniques that have been used in Australia to take control of a REIT.

A takeover bid: this involves a potential acquirer making an offer to all unit holders of a target REIT to acquire their units in the REIT on the same terms. The bid may be made “off-market” (involving written offers to all unit holders) or “on-market” (where the bidder’s broker stands in the market for a minimum period of one month and offers to buy all securities offered at the bid price). On-market bids are relatively rare because they must be for cash and unconditional.

Schemes: a REIT can take over another REIT by agreement through a scheme approved by a special resolution of the members of the target REIT (trust scheme). The scheme provisions are incorporated in the constitution of the target REIT. A scheme can be used for either a listed REIT or an unlisted REIT. If the target REIT is listed, the scheme would also need the approval of target members under the takeovers provisions of the Corporations Act.

Replacing the responsible entity: the third technique is to replace the responsible entity. The responsible entity of a REIT can be replaced by a resolution of unit holders. If the acquirer’s aim is to take-over the business of managing the REIT, rather than ownership and control of the REIT itself, it will usually be cheaper and faster for it to seek to be appointed as responsible entity of the REIT in place of the current responsible entity at a unitholders’ meeting. In essence, the takeover becomes a proxy battle.

Foreign investment in REITs

Where the proposed acquirer or new responsible entity is foreign owned or controlled, approval may be required under Australia’s foreign investment laws, however, foreign institutional investment in REITs in Australia will not usually give rise to issues under Australia’s foreign investment laws because the investment will usually fall below relevant thresholds. Nonetheless, foreign control over Australian real estate funds or fund managers, and changes in controlling interests in a responsible entity, may do so.

Michael Wadley heads Blake Dawson’s China practice
Lee I Ching is a foreign lawyer in the Shanghai office of Blake Dawson