Singapore Reits can be made more attractive to global investors

REAL estate investment trusts (Reits) are a staple in retail investors' portfolios, thanks to zero interest rates, an ageing demographic and a hunger for yield. Singapore investors are spoilt for choice; there are more than 30 Reits listed, with a combined market capitalisation of over S$60 billion. The Monetary Authority of Singapore's (MAS) latest review of the rules and governance of Reits through a consultation paper is thus timely. The proposals seek to strengthen the framework in terms of protecting unitholders' interests and mandating greater disclosure.

It stops short, however, of taking a stand on one sore point that may have kept some global investors on the sidelines of Singapore Reits: the question of internal versus external management. A 2014 white paper by Aprea (Asia Pacific Real Estate Association) noted that global investors have an overwhelming preference (94 per cent) for internally managed vehicles, based on its survey of institutional investors and fund managers. It found that the externally managed structure which dominates in the Asia Pacific (and in Singapore) "was a major inhibitor to capital allocations in the region''. It is argued that externally managed Reits (where ownership and management are separate) raise conflict-of-interest issues and cause cost leakages. In the US, externally managed Reits have been phased out. Australia has also seen a substantial shift towards internal management.

Aprea itself, however, notes that internally managed Reits may not be cost-efficient if they are not large enough to enjoy economies of scale. Earlier this year, Fitch analysed the financial data of 18 externally managed US Reits and more than 100 internally managed Reits. It found that the cost of an internally managed Reit was actually 20 basis points higher, from a total market value perspective. While the jury is still out on which structure is superior, Singapore Reits will need to look at ways to reduce potential conflicts of interest if they are to attract global investors.