Real estate investment trusts (REITs) offer an alternative to owning properties.
Under a REIT structure, investors’ (called unitholders) money is pooled together to invest in a portfolio of income-generating real estate such as offices, hotels, hospitals, and shopping malls. Just like stocks, they can be bought and sold on a stock exchange. In return for their capital, unitholders receive regular distributions from the REITs.
The first Singapore REIT, CapitaLand Mall Trust (SGX: C38U), was listed in July 2002. It is also the largest retail REIT by market capitalisation of S$7.4 billion, as at 31 March 2018. It retail peer would be Frasers Centrepoint Trust (SGX: J69U), which is also a retail REIT that owns shopping malls such as Causeway Point and Changi City Point.
Since REITs have a structure that is different from listed companies, it would be useful to go through a typical trust structure to help investors better understand REITs.
Let’s use Frasers Centrepoint Trust’s structure as an example here.
Source: Frasers Centrepoint Trust corporate website
A trustee holds the underlying properties of a REIT on behalf of unitholders. The trustee’s role is to ensure that the REIT is complying with all applicable laws, and that the rights of unitholders are protected. In exchange for providing the services, the trustee is paid a fee. For Frasers Centrepoint Trust, the trustee’s fee is 0.1% per year of the value of the REIT’s properties.
Manager (or REIT manager)
The REIT manager is a separate company set up to run the REIT. It is usually a wholly-owned or partly-owned subsidiary of a REIT’s sponsor (more on sponsors later). The chief executive officer (CEO) of a REIT manager is just like the CEO of any listed company.
The central role of a REIT manager is to set the strategic direction for the REIT, and enhance the REIT’s property value to maximise rental income, which leads to higher distributions for unitholders. A REIT manager also supervises a property manager (explained below) in its day-to-day management of the assets.
REIT managers are paid recurring management fees for their services. Frasers Centrepoint Trust’s manager receives a base fee of 0.3% per annum of the value of the REIT’s properties and a performance fee of 5% per year of the net property income (NPI). The manager can choose to receive the payments in cash or units, or both.
Frasers Centrepoint Trust’s manager is also entitled to receive an acquisition fee of 1% of the acquisition price and a divestment fee of 0.5% of the sale price on all acquisitions or disposals of assets.
The property manager takes care of the day-to-day operations of the properties in the REIT’s portfolio. This includes daily upkeep of the properties, running marketing events to attract tenants or shoppers (in the case of shopping malls), and ensuring the best tenancy mix to maximise rental income.
In return, the property manager is paid a property management fee. For Frasers Centrepoint Trust, the property management fees are 2% per annum of gross revenue, and 2% to 2.5% per year of NPI.
Sponsor (not present in all REITs)
One thing missing from the flowchart above is the sponsor. In Frasers Centrepoint Trust’s case, the sponsor is Frasers Property Ltd (SGX: TQ5). Not all REITs have a sponsor.
A sponsor typically supplies the properties to be placed into the REIT’s initial portfolio, and may continue to provide a pipeline of assets for the REIT. Most of the time, the sponsor also owns large stakes in the REIT manager, and the REIT.
Frasers Property, which has full ownership of five retail malls in Singapore, except for one, could inject these properties into Frasers Centrepoint Trust’s portfolio in the future. The five properties are Northpoint City South Wing, Robertson Walk, Valley Point, The Centrepoint, and Waterway Point (33.3% ownership).
As of 24 November 2017, Frasers Property had a 41.86% stake in Frasers Centrepoint Trust.
The Foolish takeaway
Understanding the different players in typical REIT structure helps investors to better appreciate how REITs function. Armed with this knowledge, they can make a more informed decision when investing in REITs. Some REITs with overseas properties may have additional layers, but the main trust structure is usually the same as what we have seen above.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. The Motley Fool Singapore has recommended units of CapitaLand Mall Trust and Frasers Centrepoint Trust. Motley Fool Singapore contributor Sudhan P owns units in CapitaLand Mall Trust.