Bearish market: Buildings in Singapore. The twin post-pandemic shocks – elevated interest rates and a worldwide shift toward work from home – have dampened investor sentiment towards REITs in the island-state. — Bloomberg
THE hottest part of Singapore’s otherwise humdrum stock market used to be institutional landlords.
Now the city’s real estate investment trusts (REITS) are begging for a revival in investor interest – and some much-needed reform.
In the decade bookended by the aftermath of the Global Financial Crisis and the onset of Covid-19, Singapore REITs had outperformed the Straits Times Index. No longer.
While the benchmark gauge hasn’t done much since hitting its highest in nearly four years in April 2022, property trusts have simply fallen off a cliff.
The twin post-pandemic shocks – elevated interest rates, and a worldwide shift toward work from home – have damped investor sentiment.
Some of the gloom may lift as the US Federal Reserve begins to ease monetary policy, but governance of Singapore REITs could hold back the much-anticipated recovery from reaching its full potential. That is why reforms must take centre stage.
Consider the spillover effect from the slow-motion crisis in the US office property market.
Digital Core-REIT is a Singaporean owner of data centres in the United States, Canada and Germany. Units in the landlord, spun out of a US-based trust in 2021, are trading below half their early-2022 levels.
When unitholders grilled the management about the deteriorating financial position of a top tenant, the Singapore REIT told them that “it would be inappropriate to speculate.”
That was in April 2023. Two months later, Cyxtera Technologies Inc filed for bankruptcy. While it accounted for just 1.7% of the American parent’s annual revenue as of December 2022, Cyxtera was the Singapore offshoot’s second-biggest client.
Ultimately, the REIT resolved the overhang by selling some of its Silicon Valley properties to Brookfield Infrastructure Partners LP.
But that doesn’t obviate the need for more timely and complete disclosures of important contractual relationships. Singapore Exchange Ltd must demand it.
It must also, for the sake of investor confidence, rebalance a playing field that’s currently tilted too much in favour of sponsors – firms that originate REITs by handing over their properties into collective ownership.
In August 2023, Swiss value investor Jan Moermann’s Quarz Capital Management Ltd succeeded in its campaign to oust the external manager owned by the Hong Kong-based ESR Group Ltd, the sponsor of Singapore-traded Sabana Industrial Real Estate Investment Trust.
After outperforming the benchmark index for many years, Singapore’s property trusts look spent. That win for minority shareholders was a watershed moment for the Singapore market.
REITs in most parts of Europe and North America are typically managed internally while those in Asia prefer to outsource the job to a firm owned by their sponsors.
Handing over activities like property acquisition, disposal and redevelopment to a new subsidiary owned by the trustee should, at least in theory, reduce the fees that currently flow to the sponsor.
Sabana could end up as a test case for similar governance structures at other property trusts.
Yet, almost a year since the shareholder vote, there is still little clarity on when the trustee will finally be able to effect the change.
Meanwhile, lawyer fees and related expenses have already exceeded S$3mil (US$2.2mil). That’s a big amount for a trust with barely S$1bil in assets and less than S$34mil available for distribution last year.
Blame the delay on the lack of legal clarity. SGX RegCo, the stocks regulator, has given one opinion on a crucial subsequent procedure; the city’s high court has expressed a very different view.
Relatively speaking, Singapore REITs are in good shape.
S&P Global Ratings’ stress tests show their credit ratings to be more resilient than their peers in China, Hong Kong, Japan and Australia – even to a big shock like 20% of tenants not renewing their leases expiring this year and next.
Nor does the city have to grapple with the funk in retail sales that’s depressing commercial property in the rival Asian hub of Hong Kong, where residents are increasingly shopping overseas and at nearby mainland Chinese cities, S&P says.
The Singapore office market does need a new wave of tenants. But there’s no crisis around the corner, just uncertainty over who would fill the demand for space if technology firms pull back.
Singapore is a property-crazy city. If apartment owners can be content with a 4% rental yield, how long will they ignore REITs that offer 5% to 8%?
Now is the time to aid the upcoming recovery with reform aimed at curbing the dominance of sponsors and handing some power back to owners – the unitholders.
Activist investors are doing their part and so is the judiciary. The rest is up to the regulators. — Bloomberg
Andy Mukherjee is a Bloomberg Opinion columnist covering industrial companies and financial services in Asia. The views expressed here are the writer’s own.
