There are close to 46 real estate investment trusts (REITs), property-related stapled securities and trusts listed in Singapore. Many of them offer investors here a chance to own a diversified pool of properties in renowned property markets such as Singapore, Australia, Indonesia, Hong Kong, China, Japan, Germany and the US.
Of course, there are also Singapore-listed REITs that enable us to gain exposure to niche property markets including New Zealand, Vietnam, the Philippines, the Maldives, Denmark, the Netherlands, Italy, Belgium and Spain.
In Singapore, there are five main types of REITs – commercial (office) REITs, retail REITs, industrial REITs, Hospitality REITs and healthcare REITs. Investors here also have the option of investing in three REIT exchange traded funds (ETFs), which offer a low-cost and in-built diversification option.
REITs – An Easier Way To Become A Property Investor
REITs are one of the most popular types of investment for many in Singapore. Since the first REIT was listed in Singapore in 2002 – CapitaLand Mall Trust – its prominence has soared among investors.
The main reason REITs have been so successful is because it brings together two very important elements that investors in Singapore seek 1) property investments and 2) regular and lucrative distributions.
If we were to invest in properties on our own, we’d be bogged down with many time-consuming financial and logistical tasks. These likely include sourcing for a good property to invest in, negotiating the price, financing the investment (often with a hefty down payment), marketing the property to find a tenant, negotiating the rent and managing the property. Furthermore, we’d have to constantly look for tenants every few years and ensure we stay in line with regulations.
This process gets more tedious if we were to own multiple properties, and exponentially more complicated if we owned properties in multiple countries.
REITs solve this problem by presenting a significantly simpler proposition for retail investors to own multiple properties in multiple countries. It has a dedicated team of experienced real estate managers with relevant expertise as well as keen insights into individual property markets and property types.
Besides this, a good REIT manager will also be able to maximise rental returns on properties. They do this by ensuring an optimal and diverse mix of tenants, utilising common spaces better, enhancing assets to increase net lettable area and ensuring the properties do not lose relevance in the market.
In tandem, REIT managers have the scale to minimise the cost of maintaining the properties, marketing empty spaces, collecting rents and many other shared operational functions. REIT managers are also able to optimise interest payments via bank loans and bond issues.
While these are things individual property investors cannot do on their own, REIT managers charge a pretty penny for their services. Often, retail investors may not even be aware of the management fees we are actually paying. And, even if we are aware, many of us are likely to ignore it, prioritising the distribution yield we end up receiving instead.
In this article, we look at four important things you need to know about REIT management fees.
# 1 Management Of REITs Don’t Come Cheap
REITs managers typically charge a handsome sum for their services. For many REIT managers, they charge a base fee (usually between 0.25% to 0.5% of the property value), a performance fee (usually based on its income or profits), as well as an acquisition fee (of usually 1% of acquisition) and divestment fee (0.5% of divestment).
In 2015, Straits Times covered a story highlighting the fees that REIT managers were paid. This was quite a wide range from 3.4% of revenue for Ascendas Hospitality Trust to 24.7% of revenue for Keppel REIT. Taking out the outliers, the majority of other REIT managers collected a management fee of between 6% and 9% of the REIT’s revenue.
To highlight an example, the REIT manager of the largest REIT in Singapore, CapitaLand Mall Trust, is a wholly-owned subsidiary of CapitaLand Limited. In FY2017, CapitaLand Mall Trust paid out close to $45.1 million in management fees (not including divestment fees in units). This was close to 6.6% of its total revenue in the year.
We should also note that management fees does not include property management fees. Property management fees for CapitaLand Mall Trust came up to $26.0 million in FY2017. Including this, close to 10.4% of the REITs revenue is paid out in management-related fees.
# 2 They Receive Payment In Units
Another thing we should note is that REIT managers usually receive part of their fees in units of the REIT. This has two main implications.
Firstly, shareholders are slowly being diluted every year. With more units in issue, the properties in our REIT investments have to earn a higher income just to pay out the same distributions as the year before. If shareholders expect increasing distributions, the properties in the REITs would have to deliver a significantly better performance.
Again, to highlight an example, Soilbuild Business Space REIT issued close to 9.9 million new units to its management in FY2017. This works out to be close to 1% of its units in issue at the start of the year or $6.0 million.
# 3 Artificially Boosting Of Distributions
The second implication deserves a whole point of its own.
Some REIT managers may choose to take a more substantial chunk of the management fees in units. This not only dilutes existing shareholders at a much faster pace, but allows the REIT to distribute an artificially inflated yield to shareholders.
This is possible as less cash is paid out in management fees, in lieu of units, and more cash can go towards paying out better distributions.
# 4 Incentivised To Make Transactions
As mentioned earlier, REIT managers charge an acquisition and divestment fee component. This incentivises them to make transactions in order to maximise their management fees.
Those who are more cynical can interpret this as a chance for REIT managers to push for acquisitions and asset recycling (divestment of assets after a few years), even if it does not amount to an optimal financial decision for the REIT.
In many cases, REIT managers are associated companies of their sponsors. This may create pressure for the REITs to absorb their properties which may, or may not, be the best decision for the REIT, and perhaps even at inflated prices.
Also, REIT managers are paid a base fee which is usually based on the total property value as well as performance fee usually based on income. This may incentivise REIT managers to grow the REIT, regardless of whether it is purchasing sub-optimal properties or ramping up leverage to do so.
REIT Management Is Big Business
As you can see, investors pay a sizeable sum for the expertise of the REIT managers. If we believe that is a good business, we can consider investing in some of the listed REIT managers. If you look at the REITs listed here, you’ll see that many of them carry the name of a renowned listed property developer.
Some of the more common ones include Frasers Property, CapitaLand, Keppel and OUE. Several are also managed by a listed entity, including SPH, Soilbuild and City Developments. Several REITs listed here are also managed by overseas-listed companies, including US-listed Manulife (Manulife US REIT), Indonesia-listed Lippo Karawaci (First REIT and Lippo Malls Indonesia Trust), Australia-listed Cromwell Property (Cromwell European REIT) and others.
Unfortunately for investors, ARA Asset Management, which was one of the largest REIT managers in Asia ex-Japan, was privatised in 2017. However, we could still get a smaller exposure to ARA Asset Management through Straits Trading Company, which owns close to 21% of the now private real estate management firm.
REITs And REIT Managers Have Done A Good Job
While there may be disadvantages to having REIT managers, we can’t deny that REITs have done very well since they were first listed in Singapore. Most continue to put in solid performances and attract growth opportunities. Much of this has to be attributed to good management of the REITs.
However, this does not mean we should turn a blind eye to its management and management fee structures. We need to continue being vigilant in monitoring our investments for changes being made in terms of fee structure, as well as acquisitions and divestments.
When the going gets tough, the strength of REITs will be defined by their management’s ability and structure.