Newsletter
Introduction to the Amended "Securities and Real Estate Investment Trusts and Securities Investment Consulting Act" and New Regime of Real Estate Investment Trusts
In order to activate the local real estate securitization market, provide investors with diversified investment channels and improve the development of the domestic asset management business, the Financial Supervisory Commission ("FSC"), with reference to the real estate investment trust regimes in Japan, Singapore, Hong Kong, proposed to introduce a new "real estate investment trust enterprise" which is permitted to raise funds of real estate investment trusts either via public offering and private placement methods. In this connection, the Executive Yuan of Taiwan passed the draft amendment to some provisions of the "Securities Investment Trust and Consulting Act " prepared by the FSC, and revised the name of the bill to the "Securities and Real Estate Investment Trusts and Securities Investment Consulting Act" and submitted the same to the Legislative Yuan for review (hereunder, the "Executive Yuan Amendment") in the middle of October in 2023.
In 2003, the Clauses of the Real Estate Securitization Act ("Real Estate Securitization Act") were promulgated to provide a legal basis for domestic Real Estate Investment Trusts (REITs). Accordingly, REITs are permitted to be issued under a "trust structure" by the locally licensed trust enterprises as the issuing entities of REITs. Considering the legal framework have been set up for more than twenty years but the scale of the real estate securitization market in Taiwan (both in terms of issuance amount and trading volume) is far less active than the major real estate securitization markets in neighboring jurisdictions, the FSC has taken reference from neighboring Asian markets (Japan, Singapore, and Hong Kong) where REITs are permitted to be issued under a "fund structure", it is proposed to open up the issuance of REITs under a fund structure which is expected to invigorate new fundraising channels into the domestic capital market.
Based on the Executive Yuan Amendment, the major points of amendment are as follows
A. The fund structure REIT is structured based on contract, by way of signing a trust contract between the trustor (i.e., real estate investment trust business enterprise) and the trustee (i.e., fund custodian). Investors of REITs are the beneficiaries of the trust contract. Further, considering the nature of business of the locally licensed securities and investment trust enterprises ("SITE") also focuses on investment management, it opens for the SITE to apply for extending the business license to engaging in and operating the real estate investment trust business (Draft Amendment Article 66).
B. To set up the qualification requirements for establishing a real estate investment trust business enterprise: (1) The institutional shareholder having real estate investment management experience of the business shall be in place, and the total number of shares held by it shall not be less than 50% of the initial issuing of shares of the real estate investment trust business enterprise (Draft Amendment Article 82-1). (2) The minimum paid-in capital requirement for real estate investment trust businesses to be further determined by the FSC (Draft Amendment Article 67). (3) The real estate investment trust business enterprises shall have the independent directors and audit committee, in lieu of the supervisors.
C. Regarding the management of fund structure REITs: (1) REITs must obtain approval from or file for effective registration with the competent authority before the offering or private placement (Draft Amendment Article 49-1). (2) There are required provisions that must be included in the REITs trust contract (Draft Amendment Article 49-2). (3) The scope of REITs investment targets mainly covers real estate, related rights to real estate and real estate related securities (with the exception that fund structure REITs are not allowed to invest in properties for residential use to avoid impacting housing prices). REITs should invest a certain percentage in real estate or related rights that generate stable income, and the distribution of profits should reach a certain percentage of distributable income each year. REITs are also allowed to engage in related-party transactions, subject to certain management measures (Draft Amendment Article 49-3). (4) REITs are allowed to borrow money from financial institutions within the authorized upper limit of borrowing ratio and to comply with public disclosure requirements and other related matters set up by the FSC (Draft Amendment Article 49-5).
D. To increase the maximum amount of fines for major violations of laws and regulations which are related to the protection of the rights and interests of beneficiaries or investors to 15 million New Taiwan Dollars from the original upper limit of 3 million to strengthen supervision power of the competent authority (Draft Amendment Article 111).
Comparing to the existing trust structure REITs established under the Real Estate Securitization Act, generally there are following strengths applicable to fund structure REITs:
A. Managed by the real estate investment trust business enterprises, fund structure REITs may leverage their professional expertise in management of the fund. The fund structure REITs may have effective management of the funds by having real estate investment trust business enterprises acting as the managers who have professional real estate investment management expertise and capabilities. (In contrast, the current trust structure REITs which are issued and managed by trust enterprises may not necessarily have professional expertise in real estate investment management and thus, usually delegate the investment management function to third-party real estate management companies, resulting in stricter and more conservative scrutiny of investment decisions.)
B. Allowing REITs to engage in related party transactions is beneficial in enhancing the flexibility of REITs asset allocation. It is learned that in Japan, Singapore, and Hong Kong, the main sources of investment target for REITs are often real estate developers who are part of the same group or related parties to the REITs management company. Considering of this situation, the new regime of fund structure REITs will allow for related party transactions to revitalize the assets under management. (Although the current real estate securitization regulations in Taiwan are silent on related party transaction issues, given that the trust structure REITs can only be issued by trust enterprises, currently trust structure REITs are restricted by relevant provisions of the Trust Act that related party transactions generally are prohibited.)
C. By separating custody and management responsibilities of investment assets, it is advantageous to have clear division of rights and responsibilities of the REITs. The fund structure REITs will be managed by real estate investment trust business enterprises, while the REITs assets will be held and supervised by trustee. This is different from the trust structure REITs, where the trustee is responsible for both custody and management of REITs assets and usually needs to delegate investment advisory function to third-party real estate management companies (such as construction management companies), resulting in clearer division of rights and responsibilities of REITs assets management.
Upon the Executive Yuan Amendment being officially approved by the Legislative Yuan, the securitization market in Taiwan will be parallel to: (1) fund structure REITs issued by the real estate investment trust business enterprises pursuant to the new law and (2) the current REITs issued by the trust enterprises in accordance with the Real Estate Securitization Act. This dual-track approach is expected to make the operational structure more flexible. It is worth our continuous observation of the impact on the future capital market development in Taiwan due to the introduction of the new regime.