S-Reits seek faster approval turnaround for related-party deals

Singapore

SINGAPORE may want to consider shortening the time a real estate investment trust (Reit) needs to gain unitholders' nod for related party transactions and rethink the practice of quarterly reporting for the sector.

In a report by KPMG and the Reit Association of Singapore (Reitas) entitled "Singapore - A Global Hub for Reit Listings", several heads of Reits listed on the Singapore Exchange (SGX) said speed is a key strategic advantage and a critical success factor as Reits here mature and compete in the global arena.

One of the issues raised relates to the time taken to approve related-party transactions.

In line with Singapore's corporate governance push, Reits are required to hold an extraordinary general meeting (EGM) to gain unitholders' approval for any related-party deals that involve the shareholders of the Reit manager or their subsidiaries.

The deal also needs to be reviewed by the audit committee of the Reit manager. The process, which can take up to six weeks, creates an overhang in the stock market as investors anticipate an upcoming capital raise and will either sell or not buy the units.

"It is a process that we had to learn over the years for myself and some of our operatives," said Frasers Logistics & Industrial Trust's CEO Robert Wallace. "It exposes us to external investors who may try to influence the price movements in the lead-up to the approval process. The EGM does extend the process compared to what we have seen in Australia," he added.

From Singapore regulators' point of view, while a Reit manager is required to conduct related party transactions at arm's length, conflicts of interest are inherent in such relationship-based transactions. Therefore, the requirement for unitholders' approval and due diligence by the audit committee is necessary.

Regulatory requirement for quarterly reporting is another bugbear. Reits argued that while this promotes governance and transparency, their business is unlikely to change materially over three months, and compliance puts a strain on resources - a common lament even outside the Reit sector. They shared that in Australia, for example, Reits are only required to report every six months.

Mandatory quarterly reporting - introduced here in 2003 - has been reviewed and revised over the past 15 years, and the Singapore Exchange (SGX) had even issued a consultation paper on the subject, which included proposals to allow minority shareholders to vote on either retaining or scrapping the practice and to raise the reporting bar to companies above a market capitalisation of S$150 million from the current S$75 million.

The Business Times understands a decision on this is expected soon.

The preference for a higher gearing ratio is also among the wish list items from Reits in Singapore as more Reit managers are looking beyond the small city-state in search of yield-accretive acquisitions to improve distributions to investors. They practically have no choice but to venture overseas, with more than 70 per cent of Singapore CBD Grade A-office stock already owned by Singapore Reits and developers.

The Monetary Authority of Singapore (MAS) is seeking the industry's feedback on the leverage limit. Under current rules, local Reits are only allowed to have a gearing ratio of up to 45 per cent.

Reit managers said a lower leverage could restrict growth because borrowings are capped. As a result, Reits often find it hard to compete with private equity funds when it comes to acquiring assets.

Reits in Japan, for instance, have no gearing limit, although Japanese Reits are not allowed to undertake development activities.

Ronald Tan, SGX's director of Equity Capital Market, said Singapore's conservative gearing ratio is to help protect investors.

He told BT the gearing limit review is intended to ensure that Singapore's Reit regime remains relevant and competitive in a rapidly changing global environment.

"A key consideration is how adjusting the gearing limit would support the growth of Reit managers and unitholders' risk adjusted returns, while protecting investors' interests with the right level of financial disclosure on the use of the additional leverage and the Reit's ability to service the additional debt."

Reits have pointed to a need to improve analyst research and investor education - necessary elements to broaden the investor base, enhance liquidity and facilitate fundraising.

"Education is working, but there's still some way to go," said Manulife US Reit's CEO Jill Smith.

Cindy Chow, CEO of Mapletree North Asia Commercial Trust, noted the challenges involved in assessing a Reit comprising different markets.

To help mitigate this knowledge gap, Cromwell European Reit shares its in-house research, which is produced by its European team, with local analysts who cover the Reit, according to Simon Garing, Cromwell European Reit's CEO.

Others like Manulife US Reit has been organising conferences and seminars to engage investors, analysts and the media about the US and the Reit's business performance.

READ MORE: Why foreign Reits list in Singapore