SINGAPORE: The upcoming Sabana Industrial REIT EGM has put the spotlight on whether internal or external managers are better for a real estate investment trust (REIT).
Activist investor and unit holder Quarz Capital wants to remove the REIT’s manager and have Sabana’s trustee internalise the management function.
Quarz also wants the trustee to set up a wholly-owned subsidiary and then appoint qualified candidates to manage the REIT’s properties.
Regardless of whether the resolutions succeed, they have raised the issue of whether external or internal managers are better.
There were 42 REITs and property trusts in Singapore with a total market capitalisation of S$98bil (RM335bil) as at June 30.
All these are externally managed, so if the Quarz resolutions are successful, it will mark the first time a Singapore REIT will embark on the internal route.
Sabana’s external manager is owned by ESR Group, a real estate firm headquartered in Hong Kong and the REIT’s largest unit holder, with a 20.6% stake.
The starting point for a REIT is often a property group that owns office buildings, shopping malls, hotels or warehouses that are generating a steady stream of rental income.
The owner, also described as the sponsor, then spins these assets off – selling them into a REIT vehicle.
The owner gets cash that it can deploy to buy or develop new assets, while the REIT’s unit holders get to enjoy a steady source of income from these properties. That, in short, is why REIT investments have become very popular with retirees.
An owner in Singapore typically sets up a company to become the REIT manager, which earns a fee from managing the properties.
As the owner was originally managing these assets, some staff get transferred to the REIT manager as they have the relevant expertise.
Over time, the REIT’s staff will expand as more properties are added to the portfolio. The staff also get more experienced in managing the properties.
While the owner has lost part of the rental income it may have had previously when it owned 100% of the properties, that is partly offset by its ownership of the REIT manager, which earns management fees.
The model is largely an internally managed one in the United States, the largest market for REITs.
Some criticisms of the externally managed model focus on the performance incentives, which may encourage the manager to take on too much debt and too much risk.
Managers who are compensated for the size of the assets – earning an acquisition fee, for example – may focus on aggressively growing in size instead of ensuring that the assets demonstrate good long-term growth.
The costs to unit holders of using external managers could also be higher than having internal management.
So, a key debate between using external and using internal managers is whether the interests of the manager and the unit holders are aligned.
Another key bone of contention revolves around whether a poor manager can be easily removed.
On the first point, some industry players have pointed out that in Singapore’s case, the intent was on creating a product that would deliver an attractive dividend yield to investors.
So REITs are regulated under the collective investment scheme where it is marketed as a unit trust product. In this situation, the success depends on the expertise of the team managing the assets.
Industry players add that Singapore is also unique in that often the sponsor has a stake in the REIT, which helps to further align interests between manager and unit holders. — The Straits Times/ANN
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