Should Singapore Reits adopt aspects of Link Reit's model?

SINGAPORE'S real estate investment trust (Reit) sector is much larger than that of Hong Kong. Reits and property trusts listed on the Singapore Exchange (SGX) have a combined market capitalisation of more than S$100 billion, which is more than double that of Hong Kong Reits.

The number of listed Reits and property trusts in Singapore is more than three times that in Hong Kong.

But Hong Kong is home to Asia's largest Reit, namely Link Reit. As at Friday, Link Reit's market capitalisation is roughly double that of each of Singapore's two largest Reits by market capitalisation, CapitaLand Integrated Commercial Trust (CICT) and Ascendas Reit.

CapitaLand Mall Trust (CMT) was the first Reit to list here in 2002. CMT was renamed CICT following its merger with CapitaLand Commercial Trust in 2020.

Ascendas Reit was the second Reit to list in Singapore, also in 2002.

Link Reit became the first Reit to list in Hong Kong in 2005. Link Reit started with a politically tricky portfolio of malls, markets, cooked food stores and carparks, located in public housing estates in Hong Kong, that was divested by the Hong Kong Housing Authority (HKHA).

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A pensioner sued the government for selling public properties. She lost the case but the lawsuit delayed the trust's listing.

As the trust owned formerly public properties in the heartlands, its management had to overcome opposition from tenants and the public to rental increases through active management and asset enhancements in its early days post-listing

Link Reit has rewarded investors by delivering growth in distribution per unit (DPU) in every financial year (FY) post listing, which is unmatched by Singapore's two oldest Reits.

Link Reit's DPU has grown from an annualised 62.68 Hong Kong cents in FY ended March 31, 2006 to HK$2.90in FY ended March 31, 2021. Over this period, the simple annual growth rate of DPU is around 24 per cent.

Ascendas Reit has grown DPU from an annualised 7.63 Singapore cents in FY ended March 31, 2003 to 14.69 Singapore cents in FY ended December 31, 2020. This represents a simple annual average growth rate of over 5 per cent.

As at Friday, units of Link Reit and Ascendas Reit traded at over seven times and about 3.5 times of their initial public offering (IPO) prices respectively.

Large Reits listed in Singapore typically have big property groups as sponsors. CapitaLand and Mapletree Investments are two of the leading sponsors of Reits listed on the SGX. These sponsors are major shareholders in their Reits and own the manager of the Reits.

In divesting its assets, the HKHA kept no shares in Link Reit. The trust is wholly owned by institutional and individual investors, and does not have a sponsor.

A sponsor may help a Reit by providing a pipeline of properties for the said Reit to acquire.

A sponsor's network can possibly help a Reit in sourcing for tenants or securing better financing terms. A trust can also leverage its sponsor's expertise in executing asset enhancements or developments.

No sponsor, no problem

But Link Reit's performance and transformation through the years shows that having no sponsor is not a problem.

Link Reit has grown DPU and net asset value through active management, asset enhancement initiatives, developments and acquisitions.

Link Reit's pro-forma portfolio value of HK$207 billion (S$36 billion) as at March 31, 2021, including its recent Guangzhou and Shanghai purchases, sees contributions from Hong Kong, China and the United Kingdom (UK)/Australia of 79 per cent, 17 per cent and 4 per cent respectively.

Link Reit also differs from Singapore Reits in having unitholders of the trust own the manager.

The costs of the manager are charged on a cost recovery basis to the Reit and no fees are charged on acquisitions or divestments.

Singapore Reits generally pay recurrent management fees linked to asset size and/or income plus fees for acquisitions and divestments to their external managers, which are typically owned by the sponsors.

For example, management fees that CICT pays its manager include base fee of not more than 0.25 per cent per annum of the deposited property and performance fee of 4.25 per cent of the net property income of each financial year.

Other fees payable to the manager include acquisition fee of not more than 1 per cent of purchase price, and divestment fee of not more than 0.5 per cent of sale price.

The general and administrative expenses of Link Reit HK$428 million in its latest FY, represents 0.20 per cent of total assets and 0.27 per cent of net assets attributable to unitholders.

The management fees of CICT alone, excluding items such as audit fees, professional fees and trustee's fees, of S$50.7 million in its latest FY, represents 0.23 per cent of total assets and 0.39 per cent of net assets attributable to unitholders.

Is Link Reit's management model more cost efficient?

And the trust's performance does not appear to suffer from the absence of an external manager that is suitably incentivised to grow returns to unitholders.

Owning the manager may be a potentially valuable asset for unitholders of Link Reit.

With its track record and expertise, could Link Reit's manager possibly grow fee income for the benefit of the trust's unitholders by managing other property funds?

Another key point that may be appreciated by an investor in Link Reit's IPO is that the number of units in issue of 2.08 billion as at March 31, 2021, is slightly lower than the 2.14 billion units issued at the time of the IPO.

Link Reit has bought back units, which are then cancelled.

In contrast, numerous Reits listed here have grown their number of units in issue substantially since listing as they raised fresh equity to fund acquisitions.

This could be via secondary placements, which dilute the interest of existing unit holders, or rights issues and preferential offerings, where existing unit holders need to inject additional funds to maintain their proportionate interest.

When Ascendas Reit listed, the number of units in issue was 545 million. As at Dec 31, 2020, the number of units in issue was 4.02 billion units, or around 7.4 times the number at the time of listing.

Link Reit's management wants Hong Kong to remain its core market and the dominant part of its portfolio. China's tier-1 cities and their surrounding areas, plus four developed overseas markets - Australia, Singapore, Japan and the UK - are target markets for the trust to grow and reduce concentration risk.

Singapore investors may get to know Link Reit better should it make an investment here.

Given uncertainties in Hong Kong, and its exposure to asset classes such as retail and office, where digitalisation poses big challenges, the path ahead for Link Reit looks tricky.

However, there may be lessons worth learning from Link Reit for SGX-listed Reits and would be aspirants.

Investors here may welcome seeing differentiated models including trusts that have no sponsor and those where unitholders own the manager.

Investors may also appreciate it if managers of trusts can deliver on growth, while being watchful on increasing the number of units in issue.

Hong Kong's tycoon owned property groups can emulate Singapore's property giants by embracing Reits to improve capital efficiency.

In turn, Singapore groups may want to study Link Reit's model and adopt some of the practices of this Asian market leader.

By Leslie Yee