Real estate investment trusts (REITs) in Singapore often have a larger company as a sponsor. The sponsor is often also the major shareholder of the REIT, and is sometimes related to the REIT’s manager. A major role of the sponsor is to provide a REIT with the rights of first refusal on properties that are owned by the sponsor. Although having a sponsor is beneficial to a REIT for the pipeline of acquisition opportunities, there remain potential conflicts of interest between a sponsor and the REIT’s minority shareholders that could result in minority shareholders getting the…
Real estate investment trusts (REITs) in Singapore often have a larger company as a sponsor. The sponsor is often also the major shareholder of the REIT, and is sometimes related to the REIT’s manager. A major role of the sponsor is to provide a REIT with the rights of first refusal on properties that are owned by the sponsor.
Although having a sponsor is beneficial to a REIT for the pipeline of acquisition opportunities, there remain potential conflicts of interest between a sponsor and the REIT’s minority shareholders that could result in minority shareholders getting the shorter end of the stick.
Here are some possible conflicts that investors should be aware of.
Sponsors prioritise REIT Manager’s interests over minority shareholders
Conflicts of interest arise when sponsors take on multiple roles in a REIT. For instance, as mentioned earlier, it is often the case that the REIT’s Manager is also related to the sponsor. This is a common phenomenon in Singapore-listed REITs. For instance, REITs sponsored by Mapletree Pte Ltd, CapitaLand Ltd (SGX: C31) and Frasers Property Ltd (SGX: TQ5), each have REIT managers that are related to their sponsors.
As a result, there may be conflicts of interest between REIT managers, sponsors, and minority shareholders, which leads me to the next point.
REIT Managers prioritising sponsor interests over minority shareholders
There could potentially be self-dealing when REIT managers prioritise sponsor interests over minority shareholders. The practice of using private placements to raise capital – the act of issuing new units of a REIT to only a select group of investors in a private deal – could potentially be because REIT Managers prioritise sponsor interests first.
There are multiple cases of private placements involving Singapore-listed REITs. In 2018, Ascendas Real Estate Investment Trust (SGX: A17U) and Frasers Logistics and Industrial Trust (SGX: BUOU) were two REITs that opted for private placements to raise funds.
Although a private placement can be beneficial because of the speed at which funds can be raised, it can also dilute minority shareholders’ stakes in a REIT. If new units sold in a private placement are at a discount to the REIT’s book value, the private placement will also lower the REIT’s book value per unit.
Self-dealing through private placements are difficult to prove. However, eyebrows should be raised when private placements occur too frequently or when private offerings are chosen over preferential offerings for no apparent reason.
Sponsors selling assets to their REITs
Another potential conflict of interest is the sale of assets from the sponsor to the REIT. There is a clear conflict of interest here, as sponsors want to get the best price from a sale. As a result, they might push for the REIT to purchase the property at a high price.
Because of a sponsor’s influence on a REIT’s Manager, and the sponsor’s common status as a major shareholder of the REIT, the sponsor has the upper hand in the deal.
It is, therefore, difficult for minority shareholders to block a transaction even if it is clear that the deal is not in the best interests of the REIT’s shareholders.
The Foolish bottom line
Sponsors provide REITs with benefits such as expertise, the rights of first refusal on properties, and a boost on credit ratings when raising funds through debt. However, there are also potential conflicts of interest between sponsors and REITs’ minority shareholders. Investors should be aware of the potential problems that these conflicts can cause and be alert to any self-dealing that harm minority shareholder interests.
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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 owns units of Frasers Logistics and Industrial Trust.