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Move will better safeguard interests of minority unit holders, some believe

Listed real estate investment trusts (Reits) could soon be covered by the takeover code - in a move some players believe would better safeguard the interests of minority unit holders.

Reits have boomed here, with some having market capitalisations that run to hundreds of millions of dollars. There is currently no framework to govern potential mergers and acquisitions involving them.

But the Monetary Authority of Singapore told BT: ‘The Securities Industry Council (SIC) is studying whether to extend the Singapore Code on Takeovers and Mergers to Reits.’

Sources say MAS has met industry players and sought their views on whether to extend the takeover code to cover Reits.

Hypothetically, because Reits are not subject to the takeover rules, a party can acquire a 30 per cent interest in a Reit - the trigger for launching a mandatory offer with listed firms - without needing to make an offer to other unit holders.

The CEO of CapitaMall Trust Management, Pua Seck Guan says it is a ’shortcoming’ that Reits are currently outside the takeover code, which came about because they were fitted into the existing unit trust framework.

Mr Pua believes that having the takeover code apply to Reits will allow for consolidation in the sector, which could be good for Reit investors.

‘If the unit prices of some Reits are not performing, more efficient vehicles can take them over and deliver more value to unit holders,’ he explained.

As to when consolidation may kick in, Yeo See Kiat, CEO of ARA Trust Management (Suntec), said: ‘Our Reit industry is in its infancy and still growing. I do not see consolidation happening presently.’

Bankers believe that Reit activity in Singapore this year will continue to be dominated by new issues coming to the market and secondary fund-raisings. But consolidation in the sector could start from next year.

The experience of more mature Reit markets like Australia suggests the growth phase of the sector, when many Reits sprout, is followed by a consolidation phase. Reits will merge so they can better exploit economies of scale, and stronger Reits will acquire weaker ones.

Bankers note that in Singapore, certain Reits enjoy a lower cost of capital than others. Investors believe specific Reits can grow successfully by acquisition and drive up their unit prices in anticipation of accretive growth. This creates a virtuous cycle in which these Reits are better placed to pursue acquisitions because they have access to cheaper capital. Such acquisitions could be in the form of physical assets or other Reits.

Industry players note that Singapore and Hong Kong are locked in competition to be the Reit hub for Asia ex-Japan. Given the size of Hong Kong property developers and the speed at which they are embracing Reits, the Hong Kong Reit market is looking at tremendous growth this year.

But players say Singapore has had an edge in terms of its Reit framework, such as having tax transparency. They believe, therefore, that regulators may be keen to continue to position Singapore as having the best Reit regulations in Asia by quickly making the relevant changes to have takeover rules apply to Reits.

Singapore’s first Reit was successfully listed in mid-2002. Today the island has seven listed Reits. And several more are expected to be listed this year, such as serviced apartment Reit Ascott Residential Trust and office Reit K-Reit Asia.

The Singapore takeover code is issued by the MAS pursuant to the Securities and Futures Act. The code is nevertheless non-binding in that it does not have the force of law. Its primary objective is fair and equal treatment of all shareholders in a takeover or merger situation.

The code is drafted with listed public companies in mind, and because Reits are unit trusts, experts believe that some work needs to be done before the code can be made applicable to Reits. MAS said: ‘Public consultation will be conducted before any amendments are made to the Takeover Code.’

Source : Business Times - 10 Feb 2006