IT TAKES ONLY 1 BLACK SHEEP
Source: Today 29/07/2005
Reit market must ensure integrity of trust managers: Ho Ching
Temasek Holdings chief executive Ho Ching has warned against "clever
financial engineering" aimed at boosting short-term performances of real
estate investment trusts (Reit).
"In any market, all it takes is one black sheep to taint the reputation of
the other players and set the market back," Ms Ho said at a dinner last
night to mark Mapletree Logistics Trust's first day of trading.
Speaking via videoconference from India, Ms Ho said that for Singapore to
be a hub for Asian Reits, it is important to ensure that the Reit market
is guided by the integrity of Reit managers, and supported by savvy
regulators and active stakeholders.
"Without a sense of fiduciary duty and moral obligation to the unit
holders, a trust manager may ramp up the portfolio size indiscriminately
without due care and regard for quality and sustainable value," she said.
"This agency problem is even more acute if the trust manager is paid based
on a percentage of the value of the portfolio it manages, and the size of
acquisitions made," she added.
Undesirable practices cited by Ms Ho include the trust manager agreeing to
buy assets at inflated prices, and the vendor agreeing to lease back the
asset at higher-than-market rent for a period of time. This way, the
vendor gets a higher upfront payment while the manager is able to boost
yields in the short term.
"In such a situation, the losers are the unit holders. In substance, they
would be sitting on a capital loss right from the start, as the purchase
price consideration far exceeds the fair market or replacement value of
the asset," she said.
Ms Ho said another way to circumvent short-term investment hurdle rates is
to defer the issue of Reit units to the future in an asset purchase.
"Such charades shore up short-term performance indicators at the expense
of longer-term pain," she said.
Mr Pua Seck Guan, the chief executive officer of Singapore's first Reit,
CapitaMall Trust, had sounded a similar warning recently.
"If you artificially prop up the distribution per unit figure through
income support or deferred payment, one day it will return to haunt you,"
he told the Business Times.
"Because at the end of the day, the results must be delivered from the
Temasek chief warns of hazards in Reits market
source: BT 29/7/2005
Using easy-to-understand examples to make her point, Ms Ho warned retail investors that Reits are not risk-free investments. 'Reits have failed in other markets - they are not one-way up-escalators for guaranteed gains.'
She gave an example. A trust manager could collude knowingly or unknowingly with financially troubled property vendors. The latter need cash and the Reit manager needs more assets to earn more fees. So it agrees to buy the assets at inflated prices and the vendor agrees to lease back the property, at inflated rents well above market rates.
The Reit's investment hurdles are technically met and both sides can claim to be 'winners' in the deal.
'The losers are the unit holders,' Ms Ho pointed out. 'Imagine what happens if the economy takes a nose dive, and the troubled vendor goes belly up. The trust manager would have to scramble to find replacement tenants. Rentals would realistically be much lower than the previously inflated level. The unit holders would be hit with a drop in distribution yield. The value of the asset in the trust will similarly take a serious beating.'
The trust manager would have 'destroyed value, through deliberate fraud or through incompetence, by poor asset acquisitions'.
'In the worst case, poorly supervised Reits may even evolve into a nasty pyramid game for crooked managers,' she said.
As for the practice of deferring the issue of trust units to fund asset purchases, her warning was: 'This may make the investment case look better initially. In reality, the pain will come later. Such charades shore up short-term performance indicators at the expense of longer-term pain... If, for whatever reason, rental rates cannot improve or asset enhancements fail to raise operating income, such deferred financial burdens could become very painful for the unit holders.'
She said that 'in substance, such deferred capital payments may be nothing more than a form of shareholder's loan'. 'If so, they should be captured in the trust's gearing ratio at the point of purchase commitment. Not doing so allows a trust to circumvent the prevailing 35 per cent gearing cap imposed by the regulators.'
Singapore Exchange chief executive Hsieh Fu Hua, when asked if SGX would tighten application approval for Reits, said: 'We expect to see Reits as a continuing healthy segment of our market. It has grown extremely well. So it's in everybody's interest, including SGX's, to maintain this healthy growth level, especially as we are aiming to see SGX become the centre for Reits in the region.'
talk cock lah who is the cause of high land prices and cost of doing business ?