Many REITs in Singapore have a sponsor, which is basically another company that supports the REIT. However, the role of a sponsor can vary from REIT to REIT, as it very much depends on the relationship between the REIT and the sponsor.
In many cases, the REIT’s sponsor is also a major shareholder of the REIT. The sponsor might have sold its own properties to the REIT to kickstart the REIT’s initial portfolio. Depending on the agreement between REIT and sponsor, the sponsor might then retain part of the ownership of the REIT when it is listed.
Sponsors can help REITs source for credit
REITs that are looking for credit can benefit from having the backing of a strong and stable sponsor. Financial institutions will be more willing to lend to a REIT that has the backing of a sponsor. The sponsor may have a prior good relationship with a financial institution that eases the process of obtaining a loan.
There are also cases where sponsors have the financial power to even provide the REIT with a loan themselves.
Sponsors may be a source of equity
Sponsors often support a REIT that is raising funds via a rights issue by subscribing to their pro-rata entitlement of their rights issue. As major shareholders, their support is crucial to the success of a new rights issue. Sponsors may often also subscribe to all or part of the excess units.
Sponsor may sell REITs their properties
There is occasionally a right-of-first-refusal deal between a REIT and its sponsor. This means that when the sponsor wants to sell its properties, it will first be offered to the REIT before anyone else. The REIT has the right to accept or reject the offer before the sponsor can put the property on sale in the market.
Furthermore, as a sponsor, it has the responsibility to ensure that the property that is offered to the REIT has a stable rental income.
The REIT may leverage on the sponsor’s expertise
The sponsor of a REIT may also occasionally have expertise that may be useful to the REIT. For instance, a REIT’s sponsor can be a developer that has the expertise to upgrade a REIT’s property.
The sponsor is also occasionally also the tenant of the REIT and provides the REIT with a stable anchor tenant.
The Foolish bottom line
There are many advantages of having a sponsor. Sponsors can provide basic financial support to REITs and REITs can also leverage on the sponsors’ expertise to grow. If you are looking for a REIT to invest in, it may be wise to look for one that has a reliable and financially strong sponsor.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Jeremy Chia doesn’t own shares in any companies mentioned.