In brief
ASIC has issued a consultation paper in which it proposes to overhaul Regulatory Guide 46 Unlisted property schemes – Improving disclosure for retail investors (RG 46), by introducing six new “if not, why not” disclosure benchmarks and revising all of the existing disclosure principles. PDSs will also need to contain an investment overview that includes the benchmark disclosure.
Under the ASIC proposal, responsible entities of unlisted property schemes will need to provide updated disclosure to investors by 1 July 2012.
Comments on the proposal can be sent to ASIC before 6 September 2011. ASIC aims to issue an amended RG 46 by December 2011.
Proposed new disclosure requirements
RG 46 currently sets out eight disclosure principles covering information which ASIC expects responsible entities of unlisted property schemes to disclose in their PDSs and ongoing disclosure to investors.
Following a review of property scheme disclosure documents, ASIC considers that disclosure in a number of areas is not being adequately addressed, particularly in relation to property development schemes.
ASIC proposes to extend to unlisted property schemes the benchmark model of disclosure already in place for unlisted debentures and mortgage schemes. Under this model, a benchmark is set for addressing a particular risk and the issuer is expected to state in the PDS and ongoing disclosure whether it meets the benchmark and, if not, why not.
While the proposed new benchmarks are within the areas already covered by the disclosure principles, the benchmarks are additional requirements and do not replace the disclosure principles.
The following table summarises the benchmarks and changes to the disclosure principles.
|
Area of disclosure |
New disclosure benchmark |
Amendments to disclosure principle |
|
1. Gearing ratio |
RE to maintain and apply a written policy that governs level of gearing at individual asset level. |
Clarification of some disclosure issues, including expected disclosure where RE is unable to calculate “look through” gearing ratio (eg property securities schemes).
|
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2. Interest cover ratio |
RE to maintain and apply a written policy that governs level of interest cover at individual asset level.
The interest expense of the scheme is not capitalised. |
Clarification of some disclosure issues, including disclosure of relationship between income received and loan payments.
Where RE is unable to calculate ICR (eg where property development scheme capitalises interest), RE to disclose reasons why and explain arrangements it has to meet payment obligations and associated risks.
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3. Scheme borrowing |
|
RE to disclose additional information about facilities, including “whether a scheme would breach any covenants in any credit facility if either the operating cash flow or the value of the asset(s) used as security for the facility were to fall by 10% or more” and “details of any terms within the facility that may be invoked as a result of investors exercising their rights under the constitution of the scheme”.
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4. Portfolio diversification |
|
RE to disclose additional information about the portfolio including whether current assets conform to investment strategy.
Property development schemes to disclose current value of development assets as percentage of total assets, and information about development timetable and milestones, funding arrangements, amounts of pre-sales and lease pre-commitments, and whether LVR exceeds 70% of the “as is” valuation.
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5. Valuations |
RE to maintain and apply a written valuation policy that requires: a valuer to meet certain prescribed standards, procedures to be followed to deal with conflicts of interest, rotation “and diversity” (?) of valuers, a pre-purchase valuation for a development property to be on an ”as is” and “as if complete” basis, a valuation report to be obtained within 2 months after the directors form the view that there is a likelihood that a decrease in value of the property may have caused a material breach of a loan covenant.
|
Consequential amendments following introduction of benchmark. |
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6. Related party transactions |
RE to maintain and apply written policies on related party transactions, including assessment and approval processes and arrangements to manage conflicts of interest. |
RE to provide information consistent with section E of RG 76 Related party transactions, including the value of the financial benefit, nature of relationship, whether member approval sought or under an exception, associated risks and related party policies and procedures.
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7. Distribution practices |
Scheme only to pay distributions from realised income of the scheme. |
RE to disclose whether current or forecast distributions are sustainable over next 12 months.
If distributions are not solely sourced from realised income, disclose other sources of funding, reasons for making distributions from other sources and impact and risks of doing so.
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8. Withdrawal arrangements |
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RE to disclose whether constitution makes provision for investors to withdraw and circumstances, and significant risks that may affect the unit price at which a withdrawal will be made.
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General comments
The new benchmarks are largely unobjectionable and (subject to formalisation of some of the policies) probably reflect existing practices to a significant degree.
Likewise, most of the proposed amendments to the disclosure principle requirements are sensible, however complying with the additional disclosure around scheme borrowing and distribution practices may be onerous.
This proposal, if implemented, will inevitably result in longer PDSs. Just the reciting of the new benchmarks and the scheme’s compliance with them will take at least a page. With respect, ASIC is engaged in wishful thinking when it states that “our proposed approach should not result in longer disclosures”. The test will be whether the additional disclosure further reduces consumer engagement with PDSs.
For further information, please contact:
T +61 2 8233 9756
F +61 2 8233 9555
The material contained in this publication is no more than general comment. Readers should not act on the basis of the material without taking professional advice relating to their particular circumstances.
