Cost efficiencies and incentives encouraging firms to domicile within city-state’s borders
THE story of Singapore as a resilient and fast-growing financial centre is not a new one. The new story, however, is that Singapore is quickly becoming Asia’s real estate investment trust (Reit) hub.
A Reit is a fund that allows individual investors to participate in large real estate ventures, such as acquiring and managing high-rise office buildings, and distributes most of its income to shareholders as dividends bypassing corporate fund-level taxes. Reits act as ‘liquid real estate’ because they can be traded as shares in public markets.
Given the battering the global real estate markets took in the depths of the downturn, many questioned the viability of the Reit model. However, just as the global Reit market led the world economy into the downturn, it is now guiding the global economy back out.
While the global Reit market is still returning, the Asian (ex-Japan) Reit market had a milder decline and has now recuperated to 2007 levels. The overall robustness of Asian Reits could be a signal that investors are bullish on the long-term prospects of Asia.
As the Asian Reit market expands, many Reit sponsors are turning to Singapore for answers.
One of the most significant institutional investors in this space, Lim Swe Guan, managing director and global head of GIC Real Estate’s corporate investment group, elaborates: ‘The focus on compliance and fiscal discipline has allowed Singapore to become a platform for cross-regional Reits and encourages foreign investment.’
He was speaking at the 2010 Asian Real Estate School & Symposium, organised by the Sim Kee Boon Institute for Financial Economics at the Singapore Management University and the Asian Public Real Estate Association.
The number of Reits in Singapore has almost doubled to 20 in the past four years – the fastest growth rate of any Asian country. The market also supports a capitalisation of around US$20 billion, second only to Japan in Asia.
In June, Moody’s raised its Singapore Reit outlook to stable and Mapletree, a real estate firm which owns or manages about S$13 billion of assets, unveiled plans to list two more Reits. This optimistic outlook on fundamentals has taken hold in the investment community as well, as evidenced by Mapletree CEO Hiew Yoon Khong’s stated goal to ‘launch more Reits and private real estate funds’.
Mr Hiew’s bullish market view is propelled by emerging Asia’s powerful economic rebound, with real gross domestic product growth of 5.7 per cent in 2009 and International Monetary Fund projections of 8.5 per cent annualised growth in 2010. Mr Hiew and other investment executives like him plan to use Singapore’s attractive regulatory environment as a platform to expand into the regional fund management business. Singapore’s current reputation as a hub for cross-border Reits did not emerge effortlessly. The first endeavour to start a Reit was made by CapitaLand with its SingMall Property Trust (SPT) in 2001, but the attempt fell short due to a lack of investor interest.
The next year, however, in mid-2002, SPT was restructured with the same three retail assets but under a new name. This time the initial public offering (IPO) was successful with a five-time subscription – it likely helped that the shares were priced more conservatively relative to net asset values.
Since then, many Reit sponsors have held significant control of S-Reit shares after IPOs and subsequently set up management companies designed to act as independent subsidiaries managing the assets within those Reits. Often, however, these Reit structures engendered agency problems including misaligned incentives which resulted in above-market property acquisitions from the sponsor’s affiliates.
Singapore has attempted to minimise such fiscally irresponsible behaviour and encourage financial discipline by implementing measures that include a 35 per cent maximum debt-to-equity capitalisation rate, third-party appraisals, required disclosure of self-dealing and an impartial board of directors.
Moreover, in 2005, the Monetary Authority of Singapore, after careful survey and analysis of the current Reit regulatory framework, further improved corporate governance by requiring more thorough disclosure of acquisition fees paid to Reit managers and certification of Reit managers.
Reit owners also benefit from a 10 per cent withholding tax on any distributions made to overseas corporate and institutional investors, as well as a stamp duty exemption when buying property in Singapore.
While the Asian Reit market is still in its infancy, Singapore is providing cost efficiencies and incentives that are encouraging companies to domicile within Singapore’s borders. Although the city-state may not convince all the regional Reits to list on the Singapore market, Singapore may eventually solidify its position as Asia’s centre for investing in public real estate if the government continues offering major tax incentives and a transparent, efficient marketplace that continues to satisfy investor demands.
By: Alok Chanani is the president of Chanani Real Estate Partners, a US-based real estate advisory and investment management firm with active interests in Asia. Susan Wachter is the Worley Professor of Financial Management at the Wharton School, University of Pennsylvania and co-director at the Centre for Asset Securitisation in Asia in the Sim Kee Boon Institute for Financial Economics, Singapore Management University