3.6 Regulations for Other CIS: Real Estate Investment Trusts and Exchange-Traded Funds
Key Takeaways
A listed REIT must keep at least 75% of its total asset value in real estate that generates recurrent rental income.
An unlisted REIT must keep at least 50% of its total asset value in real estate and/or single-purpose companies, with no more than 25% in non-real-estate assets and cash.
The same approved valuer cannot carry out more than two consecutive valuations of a REIT property, and real estate must be revalued at least once every three years.
A REIT's total borrowings must not exceed 50% of its total asset value at the time the borrowings are incurred.
The index tracked by an ETF must be diversified so that no constituent exceeds 20% of the index, or 35% for one constituent in an index made up solely of non-shares.
Why Separate Rules?
The FCE expects Consultants to know the headline rules for REITs and ETFs because investors compare them with UTS. Both are CIS regulated by the SC, but real estate and index-tracking create special issues of valuation, liquidity and diversification.
Real Estate Investment Trusts (REITs)
Asset requirements
| Requirement | Listed REIT | Unlisted REIT |
|---|---|---|
| Permitted assets | Real estate, non-real-estate assets, cash, deposits and money market instruments | Real estate, single-purpose companies, real-estate-related assets, cash, deposits and money market instruments |
| Minimum in real estate | At least 75% of total asset value in real estate generating recurrent rental income, at all times | At least 50% of total asset value in real estate and/or single-purpose companies, at all times |
| Cap on other assets | — | Non-real-estate-related assets and cash, deposits and money market instruments not more than 25% of total asset value |
Valuation
Because the REIT's promoter may be linked to the seller of a property, the SC regulates asset quality, valuation and disposals. Valuations must follow the SC's Guidelines on Asset Valuation:
- the same approved valuer cannot do more than two consecutive valuations of a particular property; and
- the Trustee must have each property (held directly or through a single-purpose company) revalued at least once every three years.
Repurchase and suspension
- A listed REIT does not repurchase units: investors sell on Bursa Malaysia.
- An unlisted REIT is normally expected to repurchase units within 30 days of a request. If the Trustee considers cancellation not in unit holders' interests (for example the property cannot be sold at a proper price), it may, with SC approval, suspend the repurchase covenant and must then call a meeting of unit holders to decide the REIT's future.
Size, borrowing and pledging
| Rule | Detail |
|---|---|
| Initial minimum size | RM100 million (may be higher for later launches) |
| Uses of borrowing | Acquire real estate and single-purpose companies (listed and unlisted); redeem units (unlisted) |
| Borrowing cap | Total borrowings not more than 50% of total asset value when incurred |
| Pledging | The manager may pledge REIT assets to secure permitted borrowings; going beyond the limit needs prior approval of the Trustee and the SC |
Exchange-Traded Funds (ETFs)
Permitted assets and replication
An ETF's assets may consist only of transferable securities, units or shares in CIS, derivatives, and deposits and money market instruments. It can track its index by:
- full replication – holding all or substantially all of the index constituents;
- representative sampling – holding a sample of the constituents; or
- synthetic replication – using derivatives to replicate the index.
Requirements for the underlying index
The ETF Guidelines require the index to:
| Requirement | Detail |
|---|---|
| Objective | Have a clearly defined objective |
| Representativeness | Appropriately reflect the market or sector |
| Diversification | No constituent above 20% of the index |
| Exception | If the index contains only non-shares, one constituent may go up to 35% |
| Other | Broadly based; sufficiently liquid; transparent and easily accessible to investors |
Investment restrictions (examples)
- Securities not traded in an eligible market: no more than 10% of NAV.
- Money market instruments, equities and debt securities of any single issuer: no more than 15% of NAV.
- Deposits with any single financial institution: no more than 20% of NAV.
- Futures only if sufficiently liquid, exchange-traded with a central counterparty, marked to market daily with at least daily margining, and cash-settled.
Depending on a fund's nature and objective, the SC may consider varying these limits on application by the Management Company.
Comparing the Three CIS
| Feature | Ordinary UTS | REIT | ETF |
|---|---|---|---|
| Main assets | Securities, cash, CIS, derivatives | Income-producing real estate | Index constituents |
| Direct real estate | Not allowed | Core asset | Not a permitted asset |
| How investors exit | Repurchase by the manager within 7 business days | Listed: sell on Bursa; unlisted: repurchase within 30 days | Sell on Bursa |
| Key borrowing limit | Temporary, for redemptions only (retail funds) | Up to 50% of total asset value | — |
Applying It: Property Exposure for a Small Investor
Cik Nadia has RM5,000 and wants property exposure. A Consultant can explain her choices:
- Direct property needs a large deposit, usually a loan, and is illiquid; she cannot sell part of a house.
- A listed REIT gives exposure to income-producing property with a small outlay; she buys and sells on Bursa through a stockbroker, at a market price that may differ from NAV.
- A UTS cannot hold real estate directly, but a balanced or REIT-focused unit trust can hold listed REIT units and property-related shares, priced at NAV and repurchased by the manager.
- A PRS fund may invest in real estate, but the money is locked in for retirement under PRS withdrawal rules.
The right answer depends on her time horizon, liquidity needs and risk tolerance, which is why the Consultant must complete a suitability assessment before recommending anything (Chapter 4).
What minimum proportion of a listed REIT's total asset value must be invested in real estate generating recurrent rental income?
60%
90%
50%
75%
Within what period is an unlisted REIT normally expected to repurchase units after receiving a request?
30 days
14 days
90 days
7 business days
An index is made up entirely of bonds. Under the ETF Guidelines, what is the maximum weight one constituent may have in that index?
35%
20%
10%
50%
Sections you finish are checked off in the contents.