Reit managers should stop charging fees for property transactions.

[SINGAPORE] Want to raise money easily? Be a listed real estate investment trust (Reit) with a large asset portfolio, ample trading liquidity, good institutional investor following, an established track record, a strong sponsor and a healthy market valuation.  

On Aug 5, CapitaLand Integrated Commercial Trust (CICT) launched a private placement of new units to raise not less than about S$500 million, largely to finance buying the remaining 55 per cent interest in the commercial component of CapitaSpring, which is located at Market Street in the Central Business District.

The book of orders closed on Aug 5, with CICT raising gross proceeds of about S$600 million through the issue of nearly 284.4 million new units at S$2.11 per unit. This represented a 2.5 per cent discount to the adjusted volume weighted average price of S$2.1637 for trades done on the Singapore Exchange on Aug 4. These new units have since been issued.

Kudos to CICT’s manager for raising a sum exceeding the market capitalisation of many locally listed entities to help fund the trust’s upping of its stake from 45 per cent to 100 per cent in Glory Office Trust (GOT), which owns CapitaSpring’s commercial component, comprising office and retail net lettable area of about 661,400 square feet (sq ft) and 11,900 sq ft, respectively. 

At the agreed property value of S$1.9 billion for a 100 per cent interest in CapitaSpring’s commercial component, a 55 per cent stake translates to S$1.045 billion.

Rich fees

While the rationale for CICT making the acquisition is sound and the fundraising was well-executed, unitholders are slapped with paying the manager acquisition fees of S$10.5 million for the trust’s purchase of 45 per cent in GOT from CapitaLand Development and the remaining 10 per cent from and Mitsubishi Estate.

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In perspective, S$10.5 million is around 23 per cent of gross revenue of the trust’s Lot One Shoppers’ Mall in Choa Chu Kang in 2024.

Sure, for all acquisitions or disposals of properties or investments, CICT’s manager is entitled to receive an acquisition fee of 1 per cent of the purchase price and a divestment fee of 0.5 per cent of the sale price. And paying Reit managers fees for property transactions is not uncommon here.

Nonetheless, are Reit managers being greedy in charging transaction-related fees?

For one, the increase of CICT’s stake in GOT represents buying more of a property that the trust is already an investor in, from parties with whom the manager has an existing relationship. 

As it stands, Reit managers are generally more than adequately paid for their work through recurring management fees. For example, with respect to authorised real estate investments, CICT’s manager is paid a base component of 0.25 per cent per annum of deposited property and a performance component of 4.25 per cent per annum of the trust’s net property income for the financial year.

According to CICT’s statement of total return for 2024, the trust incurred management fees of about S$95.6 million, with roughly equal contribution from the base and performance components.

Indeed, as Reits scale up, could formulas for recurring management fee be tweaked such that managers receive a smaller percentage of assets and/or income?

Reits largely own income-generating investment properties. Managers have to manage these properties well, which means leasing out space at competitive rates, while keeping operating costs under control. In addition, a manager has to manage a trust’s borrowings effectively. 

Furthermore, a manager might also carry out asset enhancements to boost a property’s performance or reconstitute a property portfolio by transacting assets.

All the above should constitute part and parcel of any manager’s job, with the objective being to deliver steady distribution per unit (DPU) that hopefully grows over time.

In short, if a manager is effective at reconstituting a trust’s property portfolio, the said manager should over time benefit too, as management fees would grow alongside growth in metrics such as a trust’s assets, net property income or distributable income.

Choosing to do right

CICT is the leader among Singapore Reits. It is the first listed Reit and the largest by total assets and market capitalisation. 

The trust has won various corporate governance accolades and the chairman of the board of directors of CICT’s manager Teo Swee Lian is a former top official of the Monetary Authority of Singapore (MAS).

The Reit sector is a major success story on the Singapore bourse. Today, eight of the 30 constituents of the benchmark Straits Times Index are Reits, including CICT.

Amid ongoing efforts to strengthen Singapore’s equities market development, what can help draw retail investors to local equities – including Reits – is not only the chance to make money, but also the sense that the leaders of listed entities are doing right by investors.

CICT’s manager should lead in espousing practices that have the interest of unitholders at heart. For example, consider eliminating the charging of acquisition and divestment fees in property transactions. Where CICT leads, other smaller Reits could follow.

Sure, CapitaLand Investment (CLI), which owns CICT’s manager, will be hurt by the trust’s manager earning no or much lower fees on property transactions. However, it is recurring management fees and not event-driven fees that contribute the bulk of CLI’s fee income from managing listed Reits.

CLI aspires to manage third-party money, be it in listed Reits or private funds. Being reasonable in generating fee income could be helpful in drawing more investors.   

Additionally, the Reit Association of Singapore, which touts itself as the sector’s representative voice and helps promote understanding as well as investment in local Reits, should look to do more to champion initiatives that better protect the interest of unitholders, such as managers doing away with charging fees for property transactions.    

Hopefully, Reit managers do their utmost to do right by unitholders. Otherwise, might MAS do more to push managers to cut down on charging acquisition and divestment fees on property transactions?

With Singapore’s ageing society, Reits that pay steady and possibly growing DPU can be great in providing retirees passive income. 

May managers do right by unitholders so that retail investors here embrace Reits even more. On the fee front, managers can start today by charging largely only management fees, with such fees predominantly tied to DPU. 

The writer is an investor in CICT and CLI