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29 Mar 2012

Unlisted property schemes: new disclosure rules

ASIC has finalised its new disclosure policy for unlisted property schemes.

As flagged last year, there are three key elements in the new policy (which takes the form of a major revision of Regulatory Guide 46):

  • a set of benchmarks against which a scheme will have to report on an "if not, why not" basis;
  • a more detailed set of disclosure principles governing the information to be included in PDSs;
  • a more structured approach to "clear, concise and effective" PDSs, incorporating many of the features already in use for prospectuses.

These changes will start on 1 November this year, and apply to all new PDSs issued on or after that date.

Importantly, they will also require compliance action by existing schemes and in relation to PDSs that are still in use on that date.

Background

These changes were prompted by ASIC's review of disclosure practices in the industry following its 2008 publication of Regulatory Guide 46- Unlisted property schemes—improving disclosure for retail investors.

That review found that a number of key disclosures were not adequately addressed. These included:

  • the risks associated with the borrowing maturity profile and the extent of hedging;
  • details about property development activities (primarily timetables and funding);
  • the basis of valuations and the risks associated with "as if complete" valuations;
  • reasons for distributions being made from sources other than income and the sustainability of these distributions over the next 12 months; and
  • withdrawal rights and the risks associated with withdrawal arrangements promoted to investors.

The Commission's proposals to address these issues were released in mid-2011 (in Consultation Paper 163). The new policy also incorporates a number of changes which came out of the industry submissions on those proposals.

Benchmarks

ASIC's benchmarking system has three elements:

  • ASIC identifies key risk areas that potential investors should understand before deciding whether to invest in a particular type of financial product;
  • ASIC sets a benchmark for how a product issuer should address those risks; and
  • the issuer's disclosure documents indicate whether the issuer meets the benchmark and, if it doesn't, why it doesn't (including how it addresses the issue in another way).

For unlisted property schemes, ASIC has identified six benchmarks:

  • Gearing policy - the responsible entity maintains and complies with a written policy that governs the level of gearing at an individual credit facility level (ASIC has dropped its earlier proposal to set this benchmark at the individual asset level, largely to take account of cross-collateralisation);
  • Interest cover policy - the responsible entity maintains and complies with a written policy that governs the level of interest cover at an individual credit facility level (again, the effect of cross-collateralisation required that this be changed from individual assets);
  • Interest capitalisation - the interest expense of the scheme is not capitalised;
  • Valuation policy - the responsible entity maintains and complies with a written valuation policy that requires independent valuations by registered valuers (in locations where there is a registration or licensing system for valuers) both before a property is purchased and if the directors believe that there is a likelihood that there has been a material change in the value of the property (the major difference from the consultation paper draft is that the draft only referred to material falls in the value of the property);
  • Related party transactions - the responsible entity maintains and complies with a written policy on related party transactions, including the assessment and approval processes for such transactions and arrangements to manage conflicts of interest; and
  • Distribution practices - the scheme will only pay distributions from its cash from operations (excluding borrowings) available for distribution (the final form of the benchmark addresses some concerns that the original proposal was unclear).

Disclosure principles

The disclosure principles in the original Regulatory Guide 46 – covering gearing ratio, interest cover, scheme borrowing, portfolio diversification, valuation policy (which will be deleted as a result of the new valuation benchmark), related party transactions, distribution practices and withdrawal arrangements – will be affected by the new policy. In addition, as a result of the consultation process, ASIC has established a new disclosure principle covering net tangible assets.

Among ASIC's changes that will have the most impact are:

  • disclosure of gearing ratios on an asset basis rather than scheme basis, if there is a significant difference across the assets;
  • regarding scheme borrowing, disclosure of the percentage fall in operating cash flow and/or asset values which would trigger a breach of debt covenants (a change from ASIC's earlier proposal only to require disclosure of whether a 10% drop in asset value would breach a covenant);
  • specific disclosure of material terms of the scheme's debt facilities (including loan-to-valuation and interest cover covenants, and the interest rate of the facility) and of related party transactions;
  • a requirement to clearly classify a scheme as a development and/or construction scheme if more than 20% of its assets are in development;
  • in closed-end schemes disclosure of the value of the net tangible assets of the scheme on a per-unit basis in pre-tax dollars – this is a new disclosure principle which first surfaced during the consultation process on ASIC's original proposals.

Clear, concise and effective

In line with its recent changes for prospectuses, ASIC wants structural and other "clear, concise and effective" improvements to unlisted property PDSs.

The previous version of Regulatory Guide 46 did contain some "clear, concise and effective" guidelines. These take the form of suggestions, particularly as to the form of key information about the product. ASIC's subsequent review of PDSs revealed considerable variation in the application of those suggestions, particularly in relation to the location and prominence of information. ASIC is concerned that, as a result, investors would find it difficult to compare the relative risk and return profile of different unlisted property schemes.

Accordingly, it now says that the first few pages of a PDS should include an investment overview that highlights information that is key to a retail investor’s investment decision. That investment overview should include a summary of the benchmark and disclosure principle information.

The new policy also says that the statutory requirement to be "clear, concise and effective" in a PDS would require a PDS to:

  • use plain language;
  • be as short as possible;
  • explain complex information, including any technical terms; and
  • be logically organised and easy to navigate.

Timeframe

ASIC originally proposed that the new policy should apply from 1 July 2012. However, it has now decided that 1 November 2012 would be better (largely because it will dovetail with annual reports, thus allowing the benchmarks and disclosures to be based on up to date information).

It is important to note that the new policy does not only apply to new PDSs issued on or after that date:

  • by 1 November, existing investors should be given information that complies with the new benchmark and disclosure policy (this can be done in a variety of ways – new PDS, supplementary PDS or via normal investor communication channels);
  • existing PDSs that are still in use on 1 November should also be updated.

 

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.