CapitaLand has been something of a spectator to the upheavals in the S-REIT sector in the past two years but the way in which their REITs are managed should be an example for other sponsors. While the Singapore Exchange and investment bankers particularly from DBS Bank have held up S-REITs as one of the SGX’s success stories, S-REITs have faced problems and corporate governance issues aplenty in the last couple of years.
The biggest blot on the S-REIT landscape is Eagle Hospitality Trust and its sponsor Urban Commons which raised US$565 million ($768 million) in an IPO. The IPO monies were based on valuations of assets with long master leases from Urban Commons which the latter appears to have no intention of honouring. Within months of its IPO in May 2019, EHT was suspended and an investigation involving the Commercial Affairs Department (CAD) is underway.
More recently, Lippo Mall Indonesia Retail Trust (LMIRT) announced an acquisition that would cost more than the REIT’s market capitalisation. Back in 2018, OUE Commercial REIT had announced a dilutive rights issue and an acquisition that was value-destroying. OUE Commercial REIT’s sponsor is OUE, controlled by the Riady family. Similarly, LMIRT’s sponsor is Lippo Karawaci, which is also controlled by the Riady family. “Remind me never to invest in a Riady-related REIT,” a former LMIRT unitholder remarked recently.
Despite the Riady REITs and Urban Commons fiascoes, the S-REIT sponsors and managers have, by and large, acted in the interests of their REITs’ unitholders. Among them of course is CapitaLand. It is the sponsor of two of the oldest, and largest REITs on the SGX, CapitaLand Mall Trust (CMT) and Ascendas REIT. Other developer sponsors such as Mapletree Investments and Frasers Property (FPL) have also acted in the interests of their unitholders. Increasingly though, there is now a divergence in the quality of REITs on the SGX with those by FPL, Mapletree Investments, CapitaLand and Keppel Corp commanding a significantly lower cost of capital than those with sponsors who are neither local developer sponsors nor independent.
Safe and boring
“Ultimately, investors are sophisticated. We need to treat them with the relevant respect. They have their own view and they are able to vote with their own feet, to buy or not,” says Jonathan Yap, president of CapitaLand Financial.Yap’s task is to ensure that the geography and sector focus of CapitaLand’s REITs are clear.
“CMT, CapitaLand Commercial Trust and Ascendas REIT are vehicles that are largely Singapore-focused but with a mandate to invest a small amount into overseas developed markets, and that intention remains. So CapitaLand Integrated Commercial Trust, if it happens, and Ascendas REIT will be focusing largely on Singapore and overseas developed markets,” Yap reiterates, before adding that Ascott Residence Trust is a global lodging REIT. Ascendas India Trust, CapitaLand Retail China Trust (CRCT) and CapitaLand Mall Malaysia Trust are focused on a single country, and all the countries are emerging markets. “It’s a risk return profile. Some investors like very steady mature markets exposure and some like the excitement and growth from emerging markets,” Yap says. “We hold meaningful stakes in the REITs. Our interests are absolutely aligned with unitholders and what doesn’t work for unitholders doesn’t make sense for us,” he emphasises.
Not internal vs external
With the problems that have arisen within the S-REITs with new sponsors, the age-old debate between externally-managed versus internally-managed REITs are once again being debated.
Yap is quick to defend CapitaLand’s model, which is actually akin to an internally-managed REIT with its advantages, but which also adopts the best parts of a developer-sponsored externally-managed model.
“In SIngapore, you find that sponsors put their best assets into the REITs and put their full weight behind the REIT to make sure it’s well managed,” Yap says. “What unitholders are getting through an externally managed REIT is the sponsor’s network.”
For young REITs like CRCT, the sponsor gives a little bit of help which otherwise an internally-managed REIT cannot access, Yap points out. “We have people within the group whether its property management, corporate finance, or investor relations, The sponsor can come in to help the REIT,” he says.
As for conflict of interest — CapitaLand after all owns the managers of seven REITs — Yap says the managers of each REIT are duty-bound to look after their own unitholders. “They are our partners. It’s very clear the manager will have to address its unitholders. They are putting their money alongside ours,” Yap says.
It is unusual for CapitaLand’s private funds and REITs to compete for similar type assets as REITs focus on stability of income while private funds usually have requirements such as growth and return on investment or return on equity or internal rate of return remit.
As for listing yet another REIT, Yap says, “At the right time, we will have a new listed REIT. We are not starting a REIT to just earn the fee income.”
