Retail investors of Reits should take a closer look at corporate governance

‘A DUMPING ground for underperforming real estate (assets)’. That was what a lawyer friend uttered when our lunch conversation topic turned to Reits, a relatively new investment vehicle that was introduced to the Singapore capital market at the turn of the century. He chuckled, “the big boys unload these properties onto unsuspecting retail investors”. He is right if corporate governance is weak.

Beyond looking at dividend yields propelled by distribution per unit, investors should take a closer look at corporate governance practices. Corporate governance is deemed relatively weak in Asia by many. A private equity analyst once remarked that he prefers looking at European targets as the financial numbers in many Asian companies are suspect. So, what is the state of corporate governance in Reits? And more importantly, how does it safeguard investor interests?

S-Reits’ success story

The Singapore Reit (S-Reit) market is a success story. From ground zero in 2002, the S-Reit market capitalisation today is one of the biggest in the world after pioneers and frontrunner countries such as the US, UK and Australia. Singapore also has the distinction of Reits holding a diversified portfolio of real estate out of Singapore in far-flung geographical areas such as North America, Europe, Pan-Asia and Australia. The holdings of real estate in other countries and income receipts in foreign currencies have an added plus to investors as a form of diversification – S-Reits offer one of the highest dividend yields and lower volatility compared to Reits in other jurisdictions and indexes, according to a REITAS report.