Among the S-REITs, master leases are present in healthcare REITs ParkwayLife REIT and First REIT. What was less apparent, and came to light in 2017, was the way in which these master lease agreements boosted valuations of properties artificially. This is now a glaring problem in First REIT which owns 11 Indonesian hospitals.
In the initial years, when Singapore’s REIT sector took off, master lease agreements or MLAs were a popular way for owners to monetise their assets. Property owners could sell a property into the REIT with a sale-and-leaseback agreement. The lease terms — including rents and weighted average lease expiry — would determine the pricing, which is essentially the value of the property. So the higher the rent and the longer the lease, the higher the valuation. This enabled companies like Vibrant Group and CWT to monetise their properties at higher valuations than they otherwise would have.
Of course, there comes a time when the master lessee exits the lease such as at the end of the master lease period. When this happens, the REIT manager has to find new tenants. Or, if the master lessee had sub-tenants, the REIT and property managers would have to negotiate with the sub-tenants. Vibrant Group remains an important tenant for Sabana Shariah Compliant Industrial REIT. CWT was the former sponsor of Cache Logistics Trust, which has been renamed and rebranded as ARA LOGOS Logistics Trust (ALOG).
