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An article on REITs by Colin Tan.

Saturday, November 26, 2011

A reader, Ray, brought to my attention an article in TODAY. This was in the comments section of a recent blog post. To read the comments, see:

REITs with pedigree are safer? - Comments.

A few lines from the article concerned:

... it must be said that REIT managers have mostly had to acquire their properties on the higher side of valuations if only because it is the only way they can get the owners to sell it to them.

A REIT can get a property on the cheap only when the owner is ignorant of its true market value or if it is a forced sale - many investors still do not realise this. At the same time, the REIT manager can only justify the acquisition to shareholders if it is yield-accretive. Otherwise, the REIT is better off not doing anything.

... As more properties in Singapore are acquired by the REITs, there will be fewer available on the market. As such, the asking price by the remaining landlords can only get higher. Given more time, it will become clear, if it is not so now, that the current model is not sustainable in the long run.

Read full article here.

S-REITs are getting more attention over time. That is a good thing, is it not?


Marti said...

Good thing because they might end up being better regulated. And I think the sector badly needs better and more regulations to uphold the unitholder's interests against those of the sponsor or manager.

It's a bad thing as this will make the public take notice and make the REITs more expensive. Well that can be seen as a good thing as this makes your REIT portfolio more valuable and you are only looking to divest...

AK71 said...

Hi Marti,

I do not know if the public would avoid REITs even more or if they would rush to load up on REITs because of this and subsequent actions by the authorities.

However, articles like this create awareness. It creates a buzz and starts people taking. After all, TODAY definitely has far better reach than blogs like mine. ;p

I do agree that if a REIT has self-serving sponsors like K-REIT, small unitholders will always get the shorter end of the stick.

I remember CapitaMalls Asia saying that they will only divest an asset to its REITs once the property has matured and is generating stable returns. This usually takes years.

Parts of Ocean Financial Building have not even been completed! This reminds me of the divestment of MBFC. It was a similarly rushed deal. It was as if Keppel Land was in a hurry to dump and realise a gain. History repeats itself.

There are companies which are well run and those which are not. There are sponsors who behave well and those who don't. We just have to invest accordingly. I would avoid K-REIT. ;)

Ray said...

Hi AK,

In fact Today's article wasnt really doing REITs justice. A few weeks ago, Strait Times had an article that was talking about how REITs are good investment during this market downturn. That gave more credit to REIT as an investment vehicle.

That aside, you mentioned "REIT has self-serving sponsors like K-REIT, small unitholders will always get the shorter end of the stick." Can you elaborate how is it that K-REIT sponsors are self serving? Is it the purchase of the OFC?

I understand the valuation was much higher and hence may be deem bad investment but what puzzles me most is K-REIT mgt (directors)would have their performance and reward pegged to the performance of K-REIT's shares. Putting up bad performance hurts small unitholders but would hurt themselves more right? Why would K REIT mgt go ahead with a "bad purchase" if that's what we investors think of OFC?
Care to share you perspective?

Marti said...

Agreed! IMHO sponsors should not be able to vote on deals where they are involved. Also votes by show of hands should be banned outright. And managers not get bonus when they grow the REIT size by raising cash...

You ought to read today's Business Times as it has a lengthy article on REITs cash calls. Out of the 17 which have been around for at least 4 years, only 3 haven't raised any cash. A lot of them raised more cash than what they distributed.

While cash calls aren't always bad they often are, and negative cash-flow isn't exactly what you expect of REIT :(

AK71 said...

Hi Ray,

Some would question the independence of K-REIT and many would say that Keppel Land simply dumped OFC on the REIT.

Affter all, K-REIT's management and the sponsors are rewarded for every acquisition they make, doesn't matter whether the unit price goes south or not.

We could look at the purchase of OFC positively if we want to but I can't help but have a feeling that the divestment by Keppel Land was self serving.

As a responsible sponsor, they should ensure that the property has matured and at optimum performance before divesting to their REIT vehicle. They are basically passing the buck and letting K-REIT bear all the risk now.

AK71 said...

Hi Marti,

I am not against rights issues per se. In fact, I prefer rights issues to private share placements. As a retail investor, chances are I would be excluded from the latter.

Rights issues allow all unitholders to participate in the enlarged capital base of the REIT.

Of course, not all rights issues are created equal. Rights issues should benefit unitholders. They must be used to fund yield accretive purchases. If so, I do not have an issue if the rights issue would be asking for more money from me now than they had paid out in income distributions up till now. I would be investing in a stronger entity with higher yield and it is a decision that I would have to make as if faced with a new investment proposition. That is how I would look at it.

You might be interested in this:
REITs and rights issues: Dilutive or not?

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