REIT ASIAPAC
L E G I S L AT I O N
but in 2018, there were as many as ten issuances. Among them
were offerings by Japan Real Estate Investment Corporation
(JRE), Japan Excellent Inc (JEI), and Nippon Prologis REIT (NPR).
The net proceeds of these bonds have been used to finance
buildings or projects that meet the green eligibility criteria. Such
issuance has also helped to expand the REIT’s investor base.
Legislation
JAPAN REITS STEP UP ESG
INITIATIVES, BUT CORPORATE
GOVERNANCE STILL LAGS
“Green initiatives have been the easiest for J-REITs to tackle
and many companies have pursued energy saving and protective
environment initiatives within their property portfolios,” says
Rico Kanthatham, Managing Director and Portfolio Manager at
Barings.
Rico Kanthatham,
Managing Director and Portfolio Manager at Barings
Links between the manager of the REIT and its major shareholder
(sponsor) spark management fee and related party-transaction controversy.
Invincible defends its stance.
MANAGEMENT FEES SHOULD BE ALIGNED
WITH UNITHOLDERS’ INTEREST
“An example is a tendency for some
J-REITs to issue dilutive equity to
fund property acquisitions often
under the influence of heavy-
handed sponsors,” explains Rico
Kanthatham, Managing Director
and Portfolio Manager at Barings.
However, the industry’s effort in governance is lagging,
particularly concerning related-party transactions and
management fee structures.
The management fee structure of a REIT has been contentious.
REITs in the Asia Pacific are predominantly externally managed by
a REIT manager, who is usually appointed by the sponsor. In most
REITs, the sponsor is also a major shareholder. The REIT pays the
manager a fee in return for management services. The manager
has a fiduciary duty to act in the best interest of unitholders;
however, links between the sponsor and the manager increase
the risk that they will act in the sponsor’s interest at the expense
of minority unitholders. The fee structure should align the
interest of the unitholders with those of the manager to ensure
fair governance.
“In such situations, shareholders have
virtually no voice in the matter, no
way of expressing their displeasure
for such decisions or effecting what
they perceive as necessary changes
into the management structure. The
only recourse for investors is to sell
shares of the company in question.”
Most REITs in Japan follow this fee structure, which isn’t illegal.
However, three REITs—Kenedix Retail REIT, GLP J-REIT, and
Ichigo Hotel REIT—have voluntarily changed their management
fee structure to be aligned with share price performance or
Distribution Per Unit (DPU).
Kenedix Retail REIT has introduced its DPU-linked management
fee structure since its initial public offering in 2015. To link
the asset management fees even more closely with unitholder
interests, it started “investment unit performance fee” in 2018.
This new fee will be paid if the total return on Kenedix Retail’s
investment unit exceeds the total shareholder return of the
Tokyo Stock Exchange (TSE) REIT Total Return Index.
While companies such as GLP J-REIT, Ichigo Hotel REIT,
and Kenedix Retail REIT have focused on improving their
Environmental, Social and Governance (ESG) standards, others
have remained less prominent in their efforts in integrating these
factors into their investment process.
GLP J-REIT implemented performance-linked fees and
management incentive bonuses for the asset manager. Around
two-thirds of the fees received by the asset manager are linked
to Net Operating Income and Earnings Per Unit (EPU), while
the bonuses for major executives are based on EPU and to
the relative unit price performance against the Tokyo Stock
Exchange’s REIT Index.
Among J-REITs, developments in the environmental aspect
have seen rapid progress, in part because of the establishment
of government guidelines and the ease with which companies
can set up green schemes. The Ministry of Environment of Japan
published its Green Bond Guidelines in March 2017. In FY2017,
no green bonds were issued for the funding of green buildings,
Tokyo Tower
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