Since Sept 2002, which is as far back as the FTSE REIT Index goes, REITs have outperformed the Straits Times Index by two times. Including distributions reinvested, the FTSE REIT Index has gained 520% these 20 years while the STI, with dividends reinvested, is up just 242%. In the past 10 years, the FTSE REIT Index has done three times better than the STI. This is not just based on dividends and yield alone but also on price appreciation.
Since the Global Financial Crisis (GFC), and following the European sovereign debt crisis, the interest rate cycle has been in favour of REITs, with quantitative easing and interest rates remaining at generational lows. Some 38 listed REITs now account for around 10% of Singapore’s market capitalisation. Of course, there have been outperformers and underperformers.
As the first REIT market in Asia, outside of Australia, the Singapore REIT sector started with developer-sponsors and the external manager model, which was largely copied by the rest of Asia, with the exception of Asia’s largest REIT, Link REIT, which is internally managed.
The sponsor-external manager model worked moderately well, despite some hiccups. Unsurprisingly, the best performers are those with strong, committed sponsors who are able and willing to provide a pipeline, and more importantly, to backstop any capital-raising that is required of the REIT. These REITs command lower cost of capital, including lower cost of debt, and are able to access bank loans during periods when system liquidity falls.
With economies of scale, these sponsors are able to provide property management services for their REITs, which gives them an additional advantage. Another plus for REITs with strongly committed sponsors is their size. Because of sponsor support, they have been able to grow and the larger, the more liquid they are, the more investors they attract, and they are likely to have an institutional following.
In a handful of cases, managers who put the interests of unitholders ahead of those of the sponsors — ParkwayLife REIT is an example — have also outperformed.
Financialisation of real estate
In 2002, just as The Edge Singapore got off the ground, an important development was taking place in real estate — it was being financialised through the launch of Real Estate Investment Trusts (REITs). In 2000, a merger between DBS Land and Pidemco — both of which had large amounts of debt on their balance sheets — formed CapitaLand.
In order to lighten its balance sheet, CapitaLand securitised its malls in a vehicle, Singapore Property Trust, which failed to get off the ground as Singapore’s first listed REIT. The assets were subsequently repackaged and placed in CapitaMall Trust (CMT). Still uncertain of the reception for an IPO of a REIT, CapitaLand’s second REIT, CapitaLand Commercial Trust (CCT) was given to CapitaLand shareholders as a dividend-in-specie. Eventually, CMT was renamed CapitaLand Mall Trust and merged with CCT to form CapitaLand Integrated Commercial Trust, the largest externally managed REIT in Asia. Separately,
Ascendas as it was then known, listed Ascendas REIT where Ascendas partnered Goodman Group to be Ascendas REIT’s manager. Eventually, Goodman sold its stake in the manager to Ascendas. Fast forward to this year, and Ascendas is part of CapitaLand, which in turn is being restructured into CapitaLand Investment (CLI).
In 2005, unlisted Mapletree Investments launched Mapletree Logistics Trust (MLT). Following a fiveyear hiatus, three Mapletree REITs were launched in quick succession: Mapletree Industrial Trust in 2010, Mapletree Commercial Trust in 2011, and Mapletree Greater China Trust, which was renamed to Mapletree North Asia Commercial Trust in 2013.
The CLI and Mapletree REITs continue to be well supported by their sponsors which are likely to continue to provide their REITs with pipeline, form JVs to redevelop older properties and support equity fundraising when needed. Being part of the sponsors’ families have helped these REITs access cheaper debt and lower cost of capital when fundraising.
A supportive manager
In July this year, investors were heartened by the steps taken by Yong Yean Chau, CEO of ParkwayLife REIT’s manager, to keep unitholders’ interests front and centre as he renegotiated a new master lease agreement with sponsor IHH Healthcare for the REIT’s three Singapore hospitals.
“I stressed it is not about how much rental I can get. Our objective is far more than that. It is about how to support our operator to be even more successful. Healthcare expenditure will grow in the region and the stronger players will be in a position to capitalise. The end objective is to help the operator compete. When the operator faces difficulty and loses market share it will affect the landlord and tenant default risk. Rental affordability is a big issue. Can the tenant pay me this rental for 20 years? The collaboration comes in the form of the landlord providing the tenant and operator with a platform to improve profitability,” Yong had said in an interview with The Edge Singapore in July.
ParkwayLife REIT’s new master lease agreement, which runs for 20 years, lifted rents, and as a result, the assets were revalued upwards. The starting point of the original master lease, though, was that the rent it receives can be no more than 15% of revenue, leaving sufficient room on the table for the master lessee to meet its master lease obligations.
In stark contrast, First REIT’s manager and its CEO Victor Tan struggled to make unitholders’ concerns known to its master lessee and former sponsor, Lippo Karawaci, and Siloam International Healthcare Hospitals, the hospital operator. First REIT owns 15 hospitals and a hotel and country club in Indonesia.
Ahead of the expiry of its master lease, Lippo Karawaci unilaterally informed the manager and the REIT unitholders that it could no longer afford to honour the old rental agreement and would default if the manager did not get its unitholders to agree to a new master lease agreement and raise equity to cover a shortfall in the REIT’s loanto-value levels. The new agreement shaved off around 40% of the REIT’s net asset value based on Dec 31, 2019, and almost 30% off its valuation based on Dec 31, 2020, data. Unitholders had to cough up monies through a dilutive rights issue.
REITs are not fee machines
While ParkwayLife REIT embodies why investors are attracted to REITs, managers and management companies have shown why some investors stay away from REITs. Back in 2002, just as CMT was getting off the ground, a property fund manager, ARA Asset Management, started operations. Its business model was for fee income from REITs and private equity funds.
In 2003, Fortune REIT was listed, with suburban retail assets in Hong Kong. Its sponsor was Cheung Kong, now renamed CK Hutchison Holdings, and ARA owned the manager. This worked because at the time Cheung Kong was a major shareholder of ARA. Fortune REIT persistently traded at high yields because local retail investors did not quite understand the structure of Hong Kong’s suburban retail market. It was eventually dual-listed in Hong Kong, where investors are more familiar with its assets. In 2019, Fortune REIT was delisted from the SGX.
In 2004, ARA listed its largest REIT, Suntec REIT, which to date has not had a major fundraising exercise. In the initial years, the major unitholders of Suntec REIT were Hong Kong tycoons who acquired the land and built Suntec City, the largest asset in the REIT. The tycoons divested their stake in the property into the REIT in exchange for units. This was the first example of an “independent” REIT, where ARA owned the manager, and the Hong Kong tycoons owned the REIT. But, the tycoons eventually sold their stake.
Indeed, in its first 10 years or so, for investors in the IPO, Suntec REIT returned all the capital via DPU. However, as the tycoons divested, Tong Jinquan, a Mainland Chinese property tycoon acquired a 6% stake. As a result, ARA, together with Straits Trading which became an investor in ARA, bought up around 18% of Suntec REIT to “defend” it against marauders.
The perception that some managers grew AUMs to increase their fee income came to a head in 2015 when the Monetary Authority of Singapore issued a REIT code, which instructed managers to act in the interests of unitholders and encouraged REITs to benchmark performance fees against metrics such as DPU growth.
Cost of capital, equity fundraising
As can be seen in the example of Soilbuild Business Space REIT, which listed in 2013 and delisted in April this year, a REIT trading at high yields faces challenges when it comes to acquisitions to spur growth.
For those with long memories, CMT, CCT and MLT all raised equity through dilutive rights issues in the aftermath of the GFC, when valuations of their properties declined. Investment properties in REITs are valued based on their cash flow, using a discounted cash flow (DCF) model. During the GFC, cash flow declined as interest rates rose temporarily, causing a disconnect in the markets. Hence the need to raise equity.
At any rate, the GFC demonstrated the need for strong sponsors, good assets and a good manager. And often, these factors come as a trio.
Financial engineering
Market watchers are not sure when financial engineering started. Many feel it started with income support which vendors provided when selling properties to Keppel REIT and Suntec REIT at higher valuations than their passing rents indicated.
According to industry watchers familiar with valuations, financial engineering occurred near the inception of REITs, with the IPO of Cambridge Industrial Trust which listed in 2006. Like Suntec REIT, Cambridge Industrial Trust had a manager with little skin in the game. The major unitholders were parties that had sold their properties into the REIT for the sake of the IPO. The sellers then leased back their properties for a period of around five to 15 years.
It was pointed out at the time that the valuation of the properties depended on the terms of the saleand-leaseback. Rents, valuations and weighted average lease expiry (WALE) moved in lock-step. The higher the rent and the longer the WALE, the higher the valuation.
First REIT, when it listed in 2007, unabashedly sold the hospitals of the IPO portfolio at high master lease rents and long WALE to boost valuations. However, in its defence, First REIT paid distributions for 14 years which would have enabled investors from IPO to recoup their initial investment.
Freight Links, which was renamed Vibrant Group, similarly sold its industrial properties into Sabana Shariah Compliant Industrial REIT at inflated master lease rents, to raise the value of the portfolio. Its financial engineering came to a head when The Edge Singapore pointed out in 2016 that the REIT planned a dilutive rights issue to acquire non-accretive acquisitions.
That set the ball rolling for investor activism, led by Jerry Low, a stockbroker, who got sufficient unitholders to requisition an EGM to vote out the manager in April 2017. Low set in motion shareholder activism and investors became bolder and increasingly held their REIT managers to account.
Urban Commons, the sponsor of Eagle Hospitality Trust (EHT) took financial engineering to a whole new level with master lease rents and WALE agreements. In EHT’s IPO portfolio, Urban Commons offered investors 20-year master leases for 17 hotels which as a master lessee, it appeared unlikely to ever fulfil.
In addition, Urban Commons capitalised future cash flows of the Queen Mary Long Beach, a stationary ocean liner, for 20 years and sold those cash flows into the trust for an upfront valuation of US$140 million.
EHT raised some US$568 million from investors for Urban Commons, some of whom were private banking clients of the sole manager and financial adviser, DBS Bank. EHT has divested most of its assets, supervised by the US bankruptcy courts, and is likely to be delisted in due course. Since the EHT debacle came to a head, no REIT IPOs have materialised, although a handful has always been in the pipeline.
Market watchers indicate that a REIT with a reputable sponsor is likely to list logistics properties in the next month or two.
Internalisation that failed
In the first decade of S-REITs, market observers debated on whether internally managed REITs were more efficient. However, the internalisation of Croesus Retail Trust’s (CRT) manager gave internalisation a bad name.
CRT was styled as a business trust and did not have a sponsor which held units in the trust. CRT owned shopping malls in Japan and traded persistently high yields making it difficult for the trust to acquire properties and provide the manager with more fees.
The owners of the manager devised a scheme called internalisation and made the trust’s unitholders pay $50 million for the manager. The acquisition was part-financed by a 1-for22 preferential offer of 27.7 million units at 79.7 cents a unit, which raised $22 million. The remaining $28 million was funded partly by $10 million that CRT had on hand, and partly by the proceeds of a $60 million bond issue. Soon after CRT was internalised, the owners of the manager sold the assets to Lone Star, paid cash to unitholders and dissolved the trust.
Since then, internalisation and the internal versus external manager model debate has taken a back seat in favour of a robust regulatory framework. The CRT and EHT fiascos may have dented investor confidence and investor perception of S-REITs but investors have a short memory. More likely, these fiascos caused a flight to quality.
The top 10 performers are REITs backed by good sponsors and managers. The lesson learnt from the past 19 years is to stick with the winners no matter how compressed their distribution yields.
