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Allens Arthur Robinson

Funds Management - Real Estate & Superannuation

Focus: Funds Management – July 2008

ASIC proposals to improve disclosure by unlisted property schemes

In brief: ASIC has released a draft regulatory guide that aims to improve disclosure by the responsible entities of unlisted property schemes. The guide sets out eight disclosure principles that are to be applied to upfront and ongoing disclosures to retail investors. Partner Susan Burns (view CV) and Lawyer Gary Lo report on the proposals. 

How does it affect you?

  • The Australian Securities & Investments Commission (ASIC) has proposed eight disclosure principles that are to be applied from 31 October 2008 to all new product disclosure statements (PDSs) for unlisted property schemes and to ongoing disclosures.
  • The eight disclosure principles require disclosure of information on the scheme's gearing ratio, interest cover, scheme borrowing, portfolio diversification, valuation policy, related party transactions, distribution practices and withdrawal rights.
  • ASIC considers the disclosure principles to reflect information that is required under the Corporations Act 2001 (Cth) for both upfront and ongoing disclosures.
  • Under the proposals, from 31 October 2008, ASIC will review new PDSs and ongoing disclosures for unlisted property schemes to check that the information required under the disclosure principles has been adequately disclosed. ASIC may exercise its stop-order powers if it considers that there has been material non-disclosure.
Responsible entities of unlisted property schemes will need to:
  • consider whether PDS disclosure and ongoing disclosures satisfy the disclosure principles;
  • review compliance plans and confirm that there are adequate measures to ensure compliance with the disclosure principles; and
  • start thinking about preparing the updated disclosure to scheme investors that is due by 31 October 2008.
Background

In light of the impact that recent economic events have had on the property investment sector in Australia, ASIC recently conducted a review of the disclosure practices of a number of Australian listed and unlisted property schemes. It found that listed property schemes were more likely than unlisted property schemes to disclose to retail investors the information they needed to know about investing in the property sector, including keeping investors updated as to the effect of economic turbulence on the scheme.

On 8 July 2008, ASIC released Consultation Paper 100, Unlisted property schemes – improving disclosure for retail investors (the consultation paper). The consultation paper contains a draft regulatory guide that sets out eight disclosure principles designed to give responsible entities guidance on key risks and features that ASIC considers need to be disclosed under the Corporations Act to enable retail investors to make informed investment decisions (the disclosure principles).

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The disclosure requirements

The matters that need to be clearly and prominently disclosed under the proposed disclosure principles are summarised below:

Disclosure principle  What needs to be disclosed
Gearing ratio The scheme's gearing ratio; what the ratio means in practical terms; and how investors can use the ratio to determine the scheme's level of risk.
Interest cover The scheme's interest cover (EBIT/interest expense) and how investors can use this to assess the scheme's ability to meet interest payments; and the relevance of interest cover in the context of any relevant loan covenants.
Scheme borrowing Depending on the maturity of the scheme's borrowings, either the total amount owing or, for each debt, the amount owing and the maturity profile in 12-month increments; whether amounts owing rank ahead of investors' interests; any breaches of loan covenants; and, in certain circumstances, the loan's maturity profile, the undrawn amount, and the prospects of refinancing.
Portfolio diversification The geographic location and sector of the properties in the scheme's portfolio by number and value; the most recent valuation and related information for each significant property; the portfolio lease expiry profile; the occupancy rate; details of each significant tenant; a clear description of any assets that are not direct property assets (including their value); and the responsible entity's investment strategy on the above matters (including its strategy on investing in other unlisted property trusts).

If the scheme involves property development, the responsible entity will also need to disclose the project timetable, funding arrangements, pre-sale and lease pre-commitments and development approval status.
Valuation policy The valuation policy, which at a minimum should cover how often valuations are obtained, how often independent valuations are obtained, who performs the valuation, the methodology used, the last valuation dates, whether the valuation is in accordance with industry standards and how often investors will be updated on material changes.

If a property under development is valued on an 'as if complete' basis, the 'as is' basis and the risks associated with an 'as if complete' valuation should also be disclosed. Any failure to comply with a previously disclosed valuation policy also requires disclosure.
Related-party transactions If the responsible entity enters into related-party transactions, it should disclose details of investments in, and loans, guarantees and fees to, any related party; its policy on related-party transactions; and how compliance with the policy is monitored.
Distribution practices If a scheme has made or forecasts to make distributions, the responsible entity should disclose the source of the distributions; whether the source is expected to differ from sources of previous distributions; if distributions are not solely sourced from realised income, then the reasons for making distributions from other sources; and whether distributions sourced other than from realised income are sustainable.
Withdrawal arrangements If investors are given withdrawal rights, then the maximum withdrawal period allowed under the scheme's constitution; any significant risks that may impact on the ability to withdraw; a clear explanation of how to withdraw; and any material changes to withdrawal rights (such as if the responsible entity knows that withdrawal requests will be suspended).

Responsible entities should also clearly disclose if investors have no withdrawal rights.
Not an 'if not, why not' approach

In a consultation paper regarding disclosure requirements for unlisted mortgage schemes, ASIC has proposed to adopt an 'if not, why not' approach to disclosure. Responsible entities of mortgage schemes would be required to meet certain benchmarks, or explain why they are unable to meet them.

However, ASIC has decided not to adopt this approach in relation to unlisted property schemes but has said that it may reconsider the issue after it analyses the sector to see whether its guidance has improved investor disclosures.

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When the changes are proposed to take effect

ASIC proposes that:

  • investors of existing property schemes are to be provided with updated disclosure that applies the disclosure principles by 31 October 2008; and
  • the disclosure principles are to be applied to all new PDSs and all ongoing disclosures for new and existing unlisted property schemes from 31 October 2008.

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How to apply the disclosure principles

ASIC proposes that the updated disclosure to investors of existing schemes, due by 31 October 2008, can be done by issuing a statement on the scheme's website (if the website is used regularly to update investors), or through another regular report (eg, a quarterly report) or by issuing a supplementary PDS.

New PDSs should include the information required by the disclosure principles in a clear and prominent manner. ASIC suggests that the information be presented in the first few pages of the PDS, either in a separate section or a clear and well-referenced table. The use of tables, diagrams and other consumer-friendly tools is also encouraged.

Information required to be disclosed under ongoing disclosure obligations (such as if there is a material change) should be communicated to investors as soon as practical by the most effective means possible (eg, by updates on the scheme's website). Periodic statements under s1017D should either include updates of the information that is required under the disclosure principles, or contain confirmation that there has been no change to that information. ASIC recommends that responsible entities update investors at least every six months.

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Advertising

ASIC also notes that advertising for unlisted property schemes should be consistent with the corresponding disclosures in the PDS and that, if investment ratings are used in advertising, they should be properly explained and not create a misleading impression.

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Compliance plans

ASIC expects responsible entities to critically examine their compliance plans to determine whether they set out adequate measures to ensure compliance with the disclosure principles. Compliance committees and compliance plan auditors should also be aware of the disclosure principles when carrying out their duties.

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ASIC's approach to compliance

ASIC considers the disclosure principles to reflect information that is required under the Corporations Act for both upfront and ongoing disclosures. It proposes that, as of 31 October 2008, it will assess whether the disclosure principles have been applied when it reviews PDSs and ongoing disclosures for compliance. If ASIC thinks that there has been material non-disclosure or misleading disclosure of any information required by the disclosure principles, it may exercise its stop-order powers. ASIC also warns that failure to meet the principles may result in liability to investors under the Corporations Act.

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What happens next?

ASIC has asked for comments on the consultation paper by 5 August 2008, and plans to release the regulatory guide by 2 September 2008. It has also indicated that it will produce a companion investor guide to help investors understand the enhanced disclosure principles and make better informed investment decisions.

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