Singapore Reits: the internal management model’s tough task in gaining traction.

[SINGAPORE] Giving birth to a listed real estate investment trust (Reit) with an internal manager in the Singapore market dominated by Reits and business trusts that have external managers is proving to be an arduous process.

At an extraordinary general meeting held on Aug 7, 2023, Sabana Industrial Reit’s unitholders voted to oust its external manager Sabana Real Estate Investment Management and have an internal manager wholly owned by the trustee. The trustee’s role is to act on behalf of unitholders.

Two years have passed, and an internal manager has yet to take over managing Sabana Reit. Meanwhile, internalisation costs have cumulatively amounted to S$12.2 million as at end-June this year.

Nonetheless, an internally managed Singapore-listed Reit is taking shape.

Sabana Reit’s trustee said recently that the new internalised manager has received in-principle approval from the Monetary Authority of Singapore for its capital market services licence application and that Karen Lee and Goo Li Ling are expected to be the chief executive officer and chief financial officer respectively of the said manager.

Lee appears suitable to helm Sabana Reit’s management. She was CEO of the manager of Ara Logos Logistics Trust (ALog Trust) before becoming deputy CEO of ESR Reit’s manager following ALog Trust’s merger with ESR Reit.  

In leading Sabana Reit’s internal manager, Lee carries a heavy burden. Should the trust’s performance be lacklustre under an internal manager, a blow will be dealt to advocates of the internal management model for Singapore Reits.

Internal vs external management

Generally, an internal manager is ultimately owned by a Reit’s unitholders, while an external manager is owned by a third party, such as the Reit’s sponsor. Unlike in the local Reit market, most Reits in the US – the world’s largest Reit market – run on an internal manager model. Also, Asian Reit giant Hong Kong-listed Link Reit is internally managed.

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In Singapore, the eight Reits that belong to the benchmark Straits Times Index are managed by entities owned by major property groups CapitaLand Investment (CLI), Mapletree Investments and Frasers Property , as well as global asset manager and operator Keppel .

The latest Reit to debut on the local bourse, Centurion Accommodation Reit, is managed by an external manager, which is owned by the trust’s sponsor Centurion Corporation .

A trust with an external manager may incur higher management costs. Typically, such a manager charges recurring fees that are tied to metrics such as asset size, net property income or distribution per unit among others. Also, additional fees such as acquisition and divestment fees on property transactions are charged. 

Profit margins in managing Reits can be lucrative. Indeed, investors ascribe much value to CLI for earning fees from managing Reits.

Nonetheless, investors may stomach paying external managers rich fees because the sponsors who own the managers bring value to the trusts.

A strong sponsor can provide a trust with a pipeline of properties to acquire. A sponsor may also help a trust in drawing tenants and accessing funding, as well as by providing operational support among others. 

Moreover, external managed Reits with strong sponsors can possibly better attract and retain talent as Reit management staff may be able to access training and career development opportunities in the wider sponsor group.

On the other hand, besides offering possibly lower management costs, an internal management model for Reits may reduce potential conflicts of interest that could arise in dealings between the Reit and its sponsor.

For example, questions might emerge over who benefits more in a property transaction between a trust and its sponsor. Also, could key staff of a Reit manager be moved to assume other roles within the sponsor’s group due to urgent needs in another part of the wider group?

I think the Reit sector here gains from having both internal and external managed Reits. 

Let investors choose between investing in internally or externally managed Reits. Also, having internal managed Reits may help put some pressure on external managers to show that they are worth their rich remuneration.

Sabana Reit’s challenges

I hope Sabana Reit’s new internal manager succeeds.

The trust owns a property portfolio valued at about S$913 million as at end-June, comprising 18 properties located across Singapore. The top contributor to gross rental is high-tech industrial properties, followed by warehouse and logistics properties. 

The new internal manager should be able to access debt funding at competitive rates for Sabana Reit on the back of the strength of its assets. With competent staff, the internal manager should also be able to manage property leasing, customer relationships, asset enhancements, and asset acquisitions and divestments effectively.

However, lack of size could hamper Sabana Reit when competing for investor attention against large external managed Reits with industrial property exposure. For one, CapitaLand Ascendas Rei t (Clar) owned S$16.8 billion of investment properties as at end-June.

While Clar trades at a substantial premium to its end-June net asset value (NAV) per unit of S$2.19, Sabana Reit trades below its end-June NAV per unit of S$0.50.

Awaiting a large internal managed Reit

Size matters, as Reits with large property portfolios and abundant trading liquidity tend to hog the attention of equities analysts and institutional investors.

Maybe what will really give a lift to the internal management model among Singapore Reits is the launch of a large internal managed Reit.

Will a leading property group launch an internal managed Reit instead of an external managed one because it can get a higher equities market valuation by adopting an internal management model? Or perhaps several smaller property owners can collaborate to assemble a sizeable property portfolio that is owned by a new internal managed Reit.

Possibly, the best bet is if the government injects some of its properties into a mega internal managed Reit that is listed on the Singapore Exchange (SGX). After all, Link Reit was formed by the Hong Kong government spinning off retail and car park properties that were owned by the Hong Kong Housing Authority.

The wait for an SGX-listed internal managed Reit is long and painful. Ultimately, a game changer in the form of the launch of a major new internal managed Reit will likely be needed for the internal management model to gain traction among Singapore Reits.