Australia: Foreign Real Estate Investment Trusts: Fewer Barriers to Investment

Consistent with the increasing globalisation of investment markets, the Australian Investments and Securities Commission ("ASIC") has recently granted relief to the responsible entities of a number of registered managed investment schemes to allow those schemes to invest in foreign real estate investment trusts ("REITs") which fall within the definition of "managed investment scheme" under the Corporations Act 2001 (Cth).

REITs are collective investment vehicles in which the underlying assets consist of real property. While REITs are typically structured as trusts in this market they can, depending on local market practice in each foreign jurisdiction, take different legal forms. While REITs were traditionally found in the United States, they have become increasingly popular in recent times and are now emerging in many foreign jurisdictions.

The Act prohibits the responsible entity of a scheme that is registered under Chapter 5C of the Act ("Registered Scheme") from investing scheme property in another managed investment scheme unless that other scheme is also registered (section 601FC(4)). This prohibition appears to have been included in the Act as a consumer protection measure, so that investors in a Registered Scheme are not indirectly put at risk through investments by the scheme in other unregistered schemes which are subject to less stringent controls under the Act. However, it presents a regulatory hurdle for Registered Schemes wishing to invest in foreign REITs which may be "managed investment schemes" under the Act.

The responsible entity of a Registered Scheme will only be able to invest in a foreign REIT if one of the following is satisfied:

• the REIT is structured and regulated as a collective investment vehicle in certain foreign jurisdictions (see below); or

• the investment in the foreign REIT, together with any other investments by the Scheme in unregistered managed investment schemes, does not exceed 10 percent of the value of the net assets of the Registered Scheme (see below); or

• the responsible entity seeks specific relief from ASIC from section 601FC(4) (see below).

ASIC has previously granted generic relief from the prohibition in section 601FC(4) through Class Order 98/55 Investments in unregistered schemes ("CO 98/55").

CO 98/55 provides relief from section 601FC(4) to allow the responsible entity of a Registered Scheme to invest scheme property in unregistered schemes that are regulated as collective investment schemes in certain foreign jurisdictions. However, the relief in CO 98/55 only applies to certain structures in certain foreign jurisdictions (United States, Hong Kong, the United Kingdom, New Zealand, Guernsey, the Isle of Man and Jersey) that are regulated as collective investment schemes in that particular jurisdiction, and so does not extend to the more recent REIT structures that are being adopted in foreign jurisdictions.

CO 98/55 also provides generic relief by exempting responsible entities of Registered Schemes from the requirements of section 601FC(4) where:

• the total amounts that have been invested in unregistered schemes (and that are not otherwise subject to an exception); and

• the amounts that the responsible entity should reasonably forsee may later have to be paid in relation to those investments,

do not exceed 10 percent of the value of the net assets of the Scheme.

Due to the increasing popularity of foreign REITs as an underlying investment for Registered Schemes, ASIC has recently considered and granted a large number of specific relief instruments from section 601FC(4) of the Act. ASIC has issued these relief instruments to allow responsible entities to invest in REITs in each of the United States, Japan, Canada, Hong Kong and Singapore.

ASIC's Policy Statement 178 ("PS 178") sets out the policy on exempting responsible entities from section 601FC(4). Pursuant to PS 178, ASIC will exempt a responsible entity of a Registered Scheme from 601FC(4) to allow the Registered Scheme to invest in foreign collective investment schemes that are not covered by CO 98/55 where:

1. the foreign scheme is regulated in the relevant foreign jurisdiction;
2. ASIC has entered into co-operation arrangements with the regulator in that jurisdiction;
3. the foreign regulation substantially meets the "IOSCO Principles for the regulation of collective investment schemes"; and
4. the responsible entity prepares and keeps for seven years, for each investment, a document signed by an officer of the responsible entity explaining why the investment complies with the responsible entities duties, considering the regulation that applies to the foreign scheme and any other relevant matter.

In order to obtain specific relief from section 601FC(4), responsible entities must make a formal application for relief in respect of each Registered Scheme they operate to ASIC having regard to the factors set out in PS 178. The application should set out the applicable law and policy associated with investments in REITs together with submissions which satisfy ASIC that the rules, policies and practices relating to the protection of investors in REITs in the relevant jurisdiction are "sufficiently equivalent" to the Australian regulatory regime.

ASIC indicated that it granted relief in respect of US REITs on the basis that "we considered that the risks associated with investing in these REITs were minimised because the REITs were listed on specific markets and were registered with the US Securities and Exchange Commission". Therefore, ASIC appears to base its relief on the following grounds:

1. that, regardless of the Registered Scheme's investment in unregistered managed investment schemes, retail investors in the Registered Scheme will continue to be subject to protection on the basis that the Registered Scheme is registered under Chapter 5C; and
2. that the foreign REIT is subject to adequate regulation in its own country, and is listed on specific markets acceptable to ASIC in the relevant jurisdiction.

Specific conditions on relief

ASIC imposes a number of conditions on relief from section 601FC(4) in order to ensure that investor protection is maintained. In addition to conditions which are specific to particular jurisdictions, they typically include:

1. a condition that the REIT be operated by a body that is incorporated or formed in the relevant jurisdiction;
2. a condition that the REIT be subject to an acceptable regulatory regime (including through legislation and supervision from a regulator) in that particular jurisdiction; and
3. a requirement that the responsible entity of the Scheme prepare and keep for seven years a document which explains why the investment in the REIT would comply with the responsible entities duties, considering the regulation applying to the REIT and any other relevant matter.

To date, ASIC has granted relief from section 601FC(4) to invest in foreign REITs in each of the US, Canada, Japan, Singapore and Hong Kong. We anticipate that, as the adoption of foreign REIT structures becomes more common place in other foreign jurisdictions, it is likely that ASIC will be requested to provide further relief to facilitate investments in REITs operating in those jurisdictions.

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.