REAL estate investment trusts (Reits) may be a hit with investors, but are often painted less positively by their critics.
S-Reits have been blamed for causing rents to spike and in turn stoking inflation, especially for retail and industrial properties. There is also the issue of bigger Reit players crowding out smaller developers.
Corporate governance watchers have also taken issue with Reits. One prominent concern is that managers may buy low-quality assets or overpay just to increase its portfolio size and collect higher fees.
There are also questions about the quality of foreign assets being listed in Singapore, especially if they come from a jurisdiction with its own Reit regime.
There are also questions about the quality of foreign assets being listed in Singapore, especially if they come from a jurisdiction with its own Reit regime.
While some of these concerns are valid, industry players The Business Times spoke to said that not everything can be blamed on Reits.
For example, rents and prices have indeed risen, but they argued that Reits were not the sole factor and that correlation does not equate to causation.
“I think it’s unfair to attribute increased rentals solely to Reits. Rental rates in Singapore started to increase in the mid-2000s off a low base,” said Galen Lee, head of South-east Asian real estate at UBS.
Singapore saw some lean years in the earlier part of that decade, with the downturn in 2001 exacerbated by the 9/11 terror attacks later that year, and the Sars episode in 2003.
That rental rates have gone up may have more to do with the strong economic expansion Singapore has enjoyed since then, with demand still chasing supply now.
Associate professor Sing Tien Foo from the Department of Real Estate at the National University of Singapore wondered if landlords could raise their rents indiscriminately with so much competition in the market.
“Technically . . . when prices increase, we expect them to go to another mall or go to another place where they can buy at a cheaper price,” he said, referring to consumers as an example. Similarly, for industrial properties, he doubts that Reits are able to justify higher rents without offering better products and services.
Detractors of Reits must also consider the value that Reits have added.
One notable beneficiary is the retail scene in Singapore, market watchers noted, with improved tenant mixes and more international retailers offering more choices.
Landlords have also actively engaged in face-lifts and optimising space usage for their assets, in their pursuit of improved returns. Many of those BT spoke to held out a simple yardstick: just compare a mall held by a Reit versus one that is not.
Pua Seck Guan, executive director and chief executive of Perennial China Retail Trust Management, who was the first CEO at CapitaMall Trust (CMT), credited the establishment of Reits for instilling discipline to improve value.
He said that many malls were inefficient in their layout and land usage before, therefore not maximising or improving rental income.
Agreeing, Eng-Kwok Seat Moey, managing director and deputy head of capital markets at DBS, said: “As a Reit is a yield-play instrument, investors will penalise the Reit if the Reit is not well managed, or not strategically positioned to enhance yield.”
The Reits would also want to maintain their lead in the market, Prof Sing said. “So that’s the incentive because to them they are not just collecting passive rental, they are taking a more active role in terms of making the mall successful.”
Economic benefits
The growth of the Reit market in the short span of time has also reaped economic benefits.
“I think it has created significant progress for Singapore, both in capital markets and real estate as well as in transactions, advisory, and various industries such as the banking sector,” said Jerry Koh, partner at Allen & Gledhill, an industry veteran who helped to list CMT.
In terms of competition, market watchers acknowledged that smaller players face an uphill task against the big boys.
For one thing, bigger players enjoy economies of scale, said Prof Sing. Smaller or less established players also do not have the same resonance with investors as a bluechip company does, he said, citing the popularity of SPH Reit despite it not being a property developer. SPH Reit is sponsored by Singapore Press Holdings, which owns The Business Times.
UBS’s Mr Lee said that larger Reits have the advantage of a larger balance sheet capacity to use debt to acquire assets to expand their portfolio.
“Despite this, the smaller Reits can still be attractive as they generally compensate investors with a higher yield.”
There are also niches for smaller Reits to explore. Big-name developers in Singapore are mostly active within the residential, retail and office space, Prof Sing said, but there is still a wide spectrum within the industrial space where smaller Reits can compete.
The two most recently listed S-Reits, Soilbuild Business Space Reit and Viva Industrial Trust, both touted their business park focus.
On the issue of the quality of cross-border Reits, Prof Sing said that no sponsor would want to be seen as destroying value for unitholders.
Still, the question of management fees is one that needs further examination, market players said.
Conflict of interest
In Singapore, all Reits are run by an external manager, usually fully owned by the sponsor, which has no direct employees.
While this provides the manager incentive to grow the Reit by tapping the sponsor’s pipeline of assets, there may be questions over the fees paid out and potential conflicts of interest between the manager and unitholder.
An alternative model will see the management of the Reit employed by the trust itself. In established Reit markets such as the US and Australia, both models co-exist.
Mr Lee said that the internal management model is one that will result in a greater alignment of interest with investors.
Tan Kok Huan, managing director, asset-backed structured products, capital markets group at DBS, sees no one-size fits all solution in deciding which management model is best.
“We can be penny wise, but pound foolish. On one hand, you may minimise the leakage (of fees) but you could end up with a vehicle that is less vibrant and dynamic.”
Prof Sing said that while some have argued that internal management models have done better, Singapore being a fairly young Reit market may still lack the necessary depth of expertise.
At the end of the day, investors should understand that even though Reits are defensive in nature, they are still subject to the movements of the stock market and are not identical to owning a physical unit.
“Liquidity allows investors to enter and exit their investments, but when liquidity dries up and you have too many investors looking to exit at the same time you can have a situation where the stock market value of the Reits differs materially from the valuation of its physical portfolio,” said Mr Lee.
