ASIC has finalised its revised Regulatory Guide 46 Unlisted property schemes – Improving disclosure for retail investors (RG 46). This follows a consultation process that began in July last year with the issue of Consultation Paper 163, on which we commented in this article.
ASIC has introduced six new "if not, why not" disclosure benchmarks, revised the existing disclosure principles and added a new NTA disclosure principle. PDSs will need to contain an investment overview within the first few pages that includes disclosure of the benchmark and disclosure principle information.
The deadline for responsible entities of unlisted property schemes to provide updated disclosure to investors under the new guidance has been extended from 1 July 2012 to 1 November 2012.
The new disclosure requirements
RG 46 previously set out eight disclosure principles covering information which ASIC expected 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 considered that disclosure in a number of areas was not being adequately addressed, particularly in relation to property development schemes.
Under the new RG 46, ASIC has extended 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 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 credit facility level. (ASIC previously proposed gearing at the asset level, however this was changed due to the effect of cross-collateralisation.)||Clarification of some disclosure issues, including expected disclosure where RE is unable to calculate "look through" gearing ratio (e.g. property securities schemes).|
|2. Interest cover ratio||RE to maintain and apply a written policy that governs level of interest cover at individual credit facility 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 (e.g. where property development scheme capitalises interest), RE to disclose reasons why and explain arrangements it has to meet payment obligations and associated risks.|
|3. Scheme borrowing||RE to disclose additional information about facilities, including "the amount (expressed as a percentage) by which either the operating cash flow or the value of the assets used as security for the facility must fall before the scheme will breach any covenants in any credit facility" 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".|
|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. ASIC has now clarified that it considers development to be the construction of a new building, significant increases in net lettable area or significant changes in nature or use of the property. Refurbishment of existing assets need not be considered as development.|
|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 there has been a material change in the value of the property.||The disclosure principle has been deleted.|
|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.|
|7. Distribution practices||Scheme only to pay distributions from its cash from operations (excluding borrowings) available for distribution. (This benchmark previously referred to "realised income", however this was changed due to concerns that this may be unclear.)||RE to disclose whether current or forecast distributions are sustainable over next 12 months. If distributions are not solely sourced from cash from operations (excluding borrowings) available for distribution, disclose other sources of funding, reasons for making distributions from other sources, impact and risks of doing so and whether this is sustainable over the next 12 months.|
|8. Withdrawal arrangements||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.|
|9. Net tangible assets||RE of a closed-end scheme to disclose the value of the NTA of the scheme on a per unit basis in pre-tax dollars. Methodology of calculation and practical meaning of NTA also to be explained.|
Disclosing the benchmark and disclosure principle information in the PDS
Consistent with its guidance on "clear, concise and effective" prospectus disclosure in Regulatory Guide 228, ASIC expects a PDS for an unlisted property scheme to include an investment overview as its first substantive section. The investment overview is to provide a summary of information that is key to a retail investor's investment decision, including at least a summary of the benchmark and disclosure principle information. It can include cross references to more detailed explanations elsewhere in the PDS.
ASIC expects issuers to update any existing PDSs with the benchmark and disclosure principle information by 1 November 2012. This will either be by a new or supplementary PDS, or an update in reliance on Class Order 03/237 (if available).
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.