Analysing REITS

[Nick]

Very disappointed with this MAS response to fee structure. Leaves the door open for continued use of current pegging of fees to AUM which is subject to abuse by reit managers.

SECTION 2:
ALIGNMENT OF INCENTIVES

A. FEE STRUCTURE

2.1. MAS proposed to require the performance fee payable to a REIT manager to be computed based on a methodology that meets certain principles that foster stronger alignment between a REIT manager and unitholders. MAS also invited suggestions on the possible methodologies that could be adopted to comply with
the principles.

2.2. Respondents generally agreed that in principle, a REIT manager’s fee structure should be aligned with the long-term interest of the REIT
and its unitholders. Most respondents were of the view that current disclosure in trust deeds and prospectuses is appropriate and
sufficiently effective to ensure alignment of interests. They commented that it would not be appropriate for MAS to prescribe a standard metric for fee computation, such as net asset value per unit or distributions per unit (“DPU”), as every REIT is different in terms of its business model, focus, mandate and composition.

MAS’ Response

2.3. MAS notes respondents’ agreement that the performance fee structure adopted by a REIT manager should be aligned with the long-term interests of the REIT’s unitholders. MAS will not prescribe a list of permissible fee computation methodologies as REITs vary in business models and each methodology has its merits and shortcomings. Net asset value per unit and DPU are two possible metrics that could meet the principles on performance fees. Other metrics could be used if they meet these principles.

I prefer the current proposal. Let the market decide. If the REIT Manager charges too high a fee and the performance suffers, no one would buy it. And vice versa.

Plus, I don't think there is a perfect fee structure. Any structure can be manipulated if the Manager isn't of high integrity:

Fee based on AUM = Acquire anything that is on sale = higher fees.

Fee based on DPU = Acquire anything with short land lease for higher yield = higher fees.

Fee based on NAV = Aggressively revalue buildings with lower cap rates = higher fees.

Fee based on NPI / Distributable income = Acquire anything that is on sale = higher fees.

Just look at REITs with good track record and aligned interests with unit-holders. That's the best one can do. I don't think the activist mindset works in the Asian markets.

(Not Vested in REITs)