Allowing unitholders more say over Reit managers would raise accountability

IT may be time to review rules governing Singapore-listed real estate investment trusts (Reits), to allow unitholders more say in the appointment of Reit directors and managers.

The recent declaration by activist fund managers Quarz Capital and Black Crane that they will not endorse the proposed appointments of two new independent directors at Sabana Shari'ah Compliant Reit (Sabana Reit) is a reminder of the challenges minority unitholders face when they are unhappy with a Reit's performance.

It is, in fact, already something that unitholders will be given the option to endorse the appointments at Sabana Reit's upcoming annual general meeting (AGM). The Reit had previously not allowed this. When queried on the reason for the change, both Sabana Reit and the Monetary Authority of Singapore (MAS) declined comment.

But there remains room for improvement, and not just at Sabana Reit.

Back in 2015, when MAS consulted the industry on ways to improve the corporate governance of Reits, one aspect left unchanged was the appointment of Reit managers.

MAS said then it would continue to rely on unitholders to initiate a review of the Reit manager's appointment, as this seemed to be "broadly effective".

To remove a Reit manager, unitholders holding at least 10 per cent of the Reit's issued units have to call for an extraordinary general meeting (EGM) to vote on a resolution to remove the manager. Respondents told MAS at the time it was "not difficult" for unitholders to obtain the simple majority approval needed for a manager's removal.

Some respondents also voiced concerns that requiring routine reappointment of Reit managers could "strongly deter" sponsors from setting up or injecting quality assets into Reits, for fear that they may lose control over the management of the Reit down the road. Others said Reit managers could be motivated to take a short-term view just to secure reappointments.

A few Reits and business trusts have allowed unitholders to endorse directors at annual general meetings (AGMs). These include Keppel DC Reit, Keppel Infrastructure Trust, Keppel Reit, NetLink NBN Trust, Parkway Life Reit and Starhill Global Reit.

But the idea of putting managers up for unitholders' vote remains unpopular. Some observers have also suggested that unitholders might choose a cheaper manager over a more competent one, to their detriment.

Even so, there are downsides to allowing sponsors or majority shareholders a free hand in the choice of manager. The interests of the sponsor, majority shareholder or Reit manager do not always align with those of minorities.

The little guy matters

Possibly the most egregious example of this misalignment is in Eagle Hospitality Trust. After its financial troubles began and the manager and sponsor came under scrutiny, unhappy unitholders still could not remove any of the directors. The shareholders of the manager actually acted to not re-elect an independent director who was also the chairman of the Special Committee overseeing internal investigations on the sponsor.

Recent mergers, acquisitions, and asset purchases have revealed unitholders' dissatisfaction with disadvantageous terms. It is worth regulators and Reit sponsors doing more to address minority concerns.

There should be some confidence on the sponsor's part that unitholders do recognise good management and will reward it with the reappointment of directors when this is put to the vote.

Already it is clear from the market performance of the CapitaLand, Frasers Property and Mapletree stable of S-Reits that unitholders do recognise management quality.

Some sponsors may argue that minority voting rights should be more limited than those of majority corporate shareholders, because Reits are in essence a portfolio of income-generating real estate assets managed by an external manager, and not listed companies per se. Therefore, they should not subscribe to principles of the Companies Act that allow shareholders to vote for the appointment of directors.

But recent cases of shareholder activism - such as Quarz Capital and Black Crane's successful blocking of a merger between ESR-Reit and Sabana Reit, as well as Lippo Malls Indonesia Retail Trust unitholders' attempt to postpone the vote on the unpopular acquisition of Lippo Mall Puri - are evidence that unitholders want a greater voice, and in fact think of themselves not as passive unitholders but as equity holders.

Corporate governance advocates professor Mak Yuen Teen and Chew Yi Hong, in a recent study, suggested Reits need to abide by higher standards than listed companies since unitholders are unable to appoint or remove directors and are rarely given the chance to endorse them.

A better option, they said, would be for regulators to require that trusts seek endorsement from unitholders; and that controlling unitholders, sponsors and their associates should have their voting powers limited.

Sponsors will likely put up a fight. And perhaps, it may be difficult to prevent sponsors - which often are responsible for a Reit's asset pipeline - from having a say in a Reit's management.

But giving minorities more say would improve the alignment of all interests, as sponsors or majority shareholders would be forced to incorporate minority interests into their plans.