Australia: Disclosure By Unlisted Property Schemes To Retail Investors - The Impact On Your Business

Last Updated: 16 September 2008
Article by Peter Faludi and Amy Thai


The Australian Securities & Investments Commission (ASIC) released its Regulatory Guide 46 (RG 46) on 2 September 2008, for unlisted property schemes (UPS), outlining eight disclosure principles that should apply to upfront and ongoing disclosures to retail investors. ASIC's formulation of RG 46 was in response to submissions it received to the UPS consultation paper. RG 46 differs to the UPS consultation paper in three main areas:

1) modification of aspects of benchmarks, disclosure procedures and advertising guidance; 2) clearer guidance for the method of communication of information to investors; and 3) modified implementation timetable.

The eight disclosure principles require disclosure of a scheme's gearing ratio, interest cover, scheme borrowing, portfolio diversification, valuation policy, related party transactions, distribution practices and withdrawal rights. This differs from the 'if not, why not' approach to disclosure taken by ASIC to unlisted debentures and RG 45 that applies to unlisted mortgage schemes.

When will the changes take effect?

From 30 November 2008, ASIC will review all new product disclosure statements (PDS) relating to UPS. However, existing UPS are expected to update their disclosure to investors by 30 November 2008.

Who will it affect?

ASIC's eight disclosure principles will apply to registered UPS, which have or are likely to have 50% of their noncash assets invested in real property and in other UPS, in which retail investors invest directly or indirectly. The eight disclosure principles may also apply to hybrid property schemes, depending on the scheme's proportion of assets in direct real property or UPS.

If a new PDS does not address the eight principles outlined below, ASIC may exercise its stop order powers pursuant to section 1020E of the Corporations Act 2001. Such a stop order, if imposed, will prevent issuers from issuing interests in the UPS until their PDS and/or other disclosures have been amended to reflect the required changes.

What do you need to do now?

Issuers with an existing UPS will need to issue a statement to investors. This can be done via the scheme's website or through a report, periodic statement or issuing a supplementary PDS before 30 November 2008, and for issuers of closed schemes by 31 March 2009 (earlier if investors require information on withdrawal rights).

Issuers proposing to set up a new UPS after 30 November 2008 (for open schemes), must ensure that their PDS and other relevant disclosures comply with ASIC's eight disclosure principles and that the information is presented in a clear, concise and effective manner with sufficient prominence placed on the eight disclosure principles. In all instances issuers need to ensure that advertising for the UPS is consistent with the disclosures in the PDS and where investment ratings are used, an explanation of those rates should be provided to avoid any misleading impressions. Only investment ratings from research houses that hold an Australian financial services licence may be quoted. The PDS should also include information about the business model of the scheme, track record and experience of senior management and key features and risks of the scheme.

Responsible entities of both new and existing UPS are expected to apply the disclosure principles and consider whether their PDS disclosure and ongoing disclosures satisfy the disclosure principles; including a review of compliance plans, advertising of the UPS and ensuring adequate procedures are in place to ensure compliance with the disclosure principles.

ASIC's intention is that the disclosure principles apply to both upfront (PDS) and ongoing disclosures (investor updates, periodic statements, the scheme's website etc).


ASIC proposes to apply the following eight principles to all UPS on the basis that it considers the following information to be the key to analysing the risks associated with UPS.


1. Gearing ratio

An explanation and disclosure of the scheme's gearing ratio and how the ratio can be used to determine the scheme's level of risk. The gearing ratio is to be calculated using the following formula based on the scheme's latest financial statements. Off balance sheet gearing should also be disclosed.

Gearing ratio = total interest bearing liabilities/total assets.

2. Interest cover

An explanation and disclosure of the scheme's interest cover and how the interest cover can be used to assess the scheme's ability to meet its interest payments (including its relevance to loan covenants). Interest cover is calculated using the following formula based on the scheme's latest financial statements. Off balance sheet financing should also be disclosed.

Interest cover = (EBITDA - unrealised gains + unrealised losses)/interest expense.

3. Scheme borrowing

For borrowed funds, depending on maturity, disclosure of total amount owing (for each debt) or the amount owing and maturity profile (including risks) in 12 month increments, whether the amounts owing rank ahead of investors' interest. For debts maturing within 12 months, the prospect of refinancing or possible alternative action, breach of loan covenants. For credit facilities, any undrawn amounts.

4. Portfolio diversification

The current composition of the scheme's property investment portfolio including geographic location, nondevelopment properties by sector, recent valuations of significant properties (whether valuation was performed by an independent valuer and if applicable the capitalisation rate adopted in the valuation), the portfolio lease expiry profile in yearly periods, occupancy rates, details of the top five tenants, and a clear description of any scheme assets that are not direct property assets including their value. The scheme's investment strategy including its strategy to invest in other unlisted property schemes should be disclosed. Where a scheme is involved in property development, information such as project timetable, funding arrangements, pre-sale and lease commitments and development approval status should be disclosed.

5. Valuation policy

The scheme's policy on valuations, including how often valuations are obtained, how often the scheme obtains independent valuations, if independent valuations are not regularly obtained, the reason for this, who performs the valuation, methodology used, and whether the valuation is in accordance with industry standard should be disclosed. For property under development valued on an 'as if complete' basis, the 'as is' basis of valuation including the risks should be also disclosed. Where the responsible entity fails to follow their previously disclosed procedure on valuations, or if there is a change in policy, investors should be informed of these changes. Responsible entities are to only use valuers registered under one of the state or territory valuer registration regimes or an overseas registration regime. Their valuation reports should state whether the valuation complies with industry standards and codes.

6. Related party transactions

If a scheme enters into related party transactions, there should be disclosure of details of investments in, and loans, guarantees and fees to, any related party. The scheme's policy on related party transactions and how the processes and arrangements of related party transactions are monitored should also be disclosed.

7. Distribution practices

If a scheme has made, or forecasts to make, distributions to members, there should be disclosure of the sources of those distributions. If current or forecast distributions are not from realised income, then the reasons for making distributions from other sources (including whether this is sustainable) should be disclosed.

8. Withdrawal rights

Where investors have a right to withdraw from a scheme they should be provided with an explanation on how to exercise their withdrawal rights. Other details that should be disclosed include the maximum withdrawal period allowed, and significant risk factors or limitations that may impact on investors' ability to withdraw. If withdrawals are funded by an external liquidity facility, material terms of this facility, including rights of the provider to suspend or cancel the facility must be disclosed. If investors have no withdrawal rights, then this should also be disclosed.

Omit disclosure information where it is misleading

If any of the disclosure principles have been omitted in a disclosure document due to it being misleading or clearly inappropriate if disclosed, the investors should be informed of this omission.


Compliance committee members and compliance plan auditors are expected to be aware of the disclosure principles and to review UPS compliance plans to ensure they address the disclosure requirements and other obligations of the Corporations Act. Where a compliance auditor becomes aware of a breach by a responsible entity of the disclosure principles, the auditor may be required to report the breach to ASIC.

Phillips Fox has changed its name to DLA Phillips Fox because the firm entered into an exclusive alliance with DLA Piper, one of the largest legal services organisations in the world. We will retain our offices in every major commercial centre in Australia and New Zealand, with no operational change to your relationship with the firm. DLA Phillips Fox can now take your business one step further − by connecting you to a global network of legal experience, talent and knowledge.

This publication is intended as a first point of reference and should not be relied on as a substitute for professional advice. Specialist legal advice should always be sought in relation to any particular circumstances and no liability will be accepted for any losses incurred by those relying solely on this publication.

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