https://www.businesstimes.com.sg/opinion...aged-reits
Singapore Reit sector will do better with internally managed Reits
Published Tue, Jul 23, 2024 · 05:00 AM
WE REFER to the article ‘Reit unitholders should not assume that an internal manager will automatically leave them better off’(BT, Jul 16) and would like to point to the substantial merits of internal managers for Reits. The facts are, as elaborated in an Ernst & Young paper, the debate on the merits of internal versus external management structure has already long been resolved in favour of the internal model. This is why in older and larger Reit markets such as the United States and Australia, the overwhelming majority of Reits there are internally managed.
Academic research has shown that internally managed Reits perform better. As early as in 1995, research showed that US internally managed Reits outperformed externally managed Reits by more than 7 per cent from 1985 to 1992. A study comparing the risk-adjusted performance of Australian Reits found that internally managed Reits also outperformed. Internally managed NetLink Trust and Croesus Retail Trust have also substantially outperformed their Singapore externally managed peers.
Beside Reits sponsored by GLCs such as Mapletree, CapitaLand and Keppel which have shown superior corporate governance and strong commitment to investors’protection, Reits investors have generally regarded the track records of the other sponsors as mixed and far from satisfactory.
While sponsors can provide a property pipeline, research has repeatedly shown that in many cases, Reits pay more for properties acquired from their sponsors than for assets acquired from third parties. Research also suggests that externally managed Reits are sometimes merely divestment vehicles for sponsors’ illiquid investment grade real estate which enables sponsors to recycle capital efficiently.
The review of Eagle Hospitality Trust uncovered that the external manager had not ensured that its sponsor provided security deposits on its master lease and did not prevent the sponsor from channelling loans to itself.
Both FT and Bloomberg have raised concerns at externally managed Digital Core Reit, which was spun out of the sponsor and listed on SGX in 2021. When Cyxtera filed for bankruptcy, it accounted for only 1.7 per cent of the sponsor’s revenue but more than 20 per cent of Digital Core Reit’s rental revenue.
The claims of higher financing costs is also unfounded. ESR Logos Reit – five times bigger than Sabana – reported cost of debt of 4.1 per cent. Sabana recently issued a 4.15 per cent bond post-vote to remove the external manager. Astute financiers rightly prioritise more important factors such as the property portfolio.
Under an internal manager model, all Sabana unitholders will own the internal manager which will only serve and work in the interests of unitholders. All unitholders will also have the right to vote in and remove directors. This increased corporate governance and rights will result in stronger accountability and unitholders’ protection. The profit earned by the external manager will be re-channelled back to unitholders resulting in higher distribution per unit (DPU).
While the internalisation has taken a longer time and higher cost, the trustee could have speeded up the process by five months if it had sought clarifications from the court right after the vote. With clearer precedence, the process will be substantially faster and cheaper. Sabana’s internalisation also developed from the failed merger to ESR Logo Reit in 2020 which if accepted, would have resulted in Sabana’s unit price to be at a significantly lower level.
Removing the manager and internalisation is the Monetary Authority of Singapore’s fundamental key pillar of unitholders’ protection. Without this protection, external managers will be fully entrenched – they can “do whatever they want” without any accountability. There would be a huge loss of confidence in the Singapore financial markets as investors essentially have zero recourse. The majority of current Reit unitholders currently have zero rights to appoint or remove any directors of their external managers.
Since 2014, Japan has accelerated key reforms to increase corporate governance and shareholder rights. This has successfully attracted investors and driven the equity market to a new high. The South Korean regulator and stock exchange have also initiated their Corporate Value-Up programme to reform and limit the rights of entrenched shareholder groups to attract investors.
As such, it is important that all Sabana unitholders vote for all the resolutions at the upcoming Aug 6 EGM which are for the internalisation. The successful internalisation at Sabana Reit will set a positive precedence and bring about stronger corporate governance, investors’ protection and the revival of the S-Reit market.
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