Asian REIT Market — Growing Pains for Investors
“Singapore overtaking Japan REITs” — that was the headline of an article in the October 2011 issue of AsianInvestor. Both REIT markets started a decade ago and took a pounding in the 2008 global financial crisis. Since then, Singapore real estate investment trusts (called S-REITs) have grown through asset injections and acquisitions, financed mainly by rights issues and bank financing. The growth in the Asian property market, combined with the low interest-rate environment, has made REITs an attractive long-term yield play. REITs are also attractive investments because of the tax pass-through benefits (REITs are required by law to distribute at least 90 percent of their taxable income to shareholders each year).
Not all is rosy, however. Investors beware before you step in — many of these REITs in Singapore, Hong Kong, and other Southeast Asian countries are owned by family-owned companies or state-owned enterprises that are already in the property business. It is a common practice that most assets owned by the REITs are bought from the private or public arm of the controlling shareholder. Just recently, Business Times reported that Singapore-based K-Reit pushed through its plans to buy 87.5 percent of Ocean Financial Centre at its extraordinary general meeting (EGM) from K-Reit parent company Keppel Land for $1.57 billion in Singapore dollars. Keppel Land stands to gain of $492.7 million from the transaction. Shareholders questioned the REIT manager on the steep price and the valuation before it was put to a vote.
When put to a vote, shareholders voted in favour by a show of hands. However, the request from an institutional shareholder for a poll vote was denied. Given the size of the deal and the fact it was a related-party transaction, the vote should have been carried out by poll, with the results tabulated to include the percentages voting for and against the acquisition.
Related-party transactions are just one of many governance issues in the Asia REIT market. In January 2011, CFA Institute released a report, Asia-Pacific REITs – Building Trust through Better REIT Governance, which studied REIT structures in Japan, Hong Kong, Singapore, and Australia. The governance structures of REITs in Asia have often been criticized for the lack of independence of the REIT manager. In our examination of all 22 S-REITs, we found that, on average, 43 percent of the directors were independent directors. The REIT manager is appointed by the sponsor (controlling shareholder) of the REIT, and the directors, including the independent directors of the REIT manager, are also appointed by the sponsor. This is in contrast to a corporation model, more commonly practiced in Australia, in which investors would vote for the appointment of the directors, including independent directors.
The fee structures of S-REITs are also biased towards performance fees paid based on net property income. Sixty-four percent of the 22 S-REITs in our study used this approach, which excludes interest charges. A more equitable form of compensation would be based on an index or growth in distribution per unit, aligning the interest of the manager with that of the investor.
These are some of the growing pains as investors grapple with an asset class that can provide attractive long-term returns in a low-yield environment. Would yields be better for investors if there were better corporate governance? Definitely.
The week of 24 October was Corporate Governance Week in Singapore, and I had the opportunity to speak at an investor seminar where we had a lively discussion. There are encouraging signs that investors are willing to have more public discussions and engagement with REIT managers and directors as well as review current regulations to further improve REIT governance.