Tread carefully with AREITS, says AMP Capital
The Australian Real Estate Investment Trust (AREIT) sector continues to be plagued by a number of corporate governance risks, according to AMP Capital.
In its full-year 2012 corporate governance report, AMP Capital acknowledged that AREITs are typically viewed as a stable investment option that offers "good sustainable dividends".
But AREITs borrowed heavily when the credit crisis struck and found themselves unable to refinance their debt, leaving them with no option but to raise capital by issuing new equity - a move that diluted investors' holdings and caused the AREIT index to plunge by 75 per cent, according to AMP Capital.
A review of the property sector by AMP Capital's environmental, social and governance (ESG) team identified a number of key risks that investors need to monitor in the AREIT sector.
A number of companies were found wanting when it came to the independence of their boards, according to AMP Capital.
Of the companies reviewed in Australia and New Zealand, five did not have a majority of independent directors; at least 10 had audit committees that were not fully independent; and half had directors who sat on at least three other major company boards.
In addition, many companies reviewed by AMP Capital had directors who did not hold equity in the company and/or had missed several board meetings.
Another risk for minority shareholders is related-party transactions, since AREITs are often dominated by one or a group of large shareholders, according to AMP Capital.
Excessive pay and structures that are not aligned with investors' best interests are also risks that can lead to "significant shareholder value destruction", according to AMP Capital.
While many AREIT companies put in place "substantial remuneration restructuring" following the global financial crisis, AMP Capital found the reductions have not been in proportion with total shareholder returns.
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