Analysing REITS

[CY09]

An interesting thing I have observed among Singapore bloggers is that REITs with a large presence in Singapore and their REIT manager parent company form a cornerstone of their Singapore portfolio. Here a few:

https://thefinance.sg/2025/11/29/portfol...mber-2025/

https://thefinance.sg/2025/11/29/my-inve...-nov-2025/

My thoughts is that for many Singapore investors, what has worked so far are that REITs have gone up in share prices while preserving their dividend inflow (largely thanks to Singapore's SORA also falling precariously fast, SORA is now at 1.2% and has never exceeded 4% even when USA's interest rates went up to 5.5%). This has helped to reduce the interest cost of Singapore REITs which rely a lot on SORA + margin for their loans

If we look from the economic theory of "Factors of Production", of which 3 factors have true cost, they are (i) Cost of Capital, (ii) Cost of Labour, (iii) Cost of Land.

In Singapore, Cost of capital has always been kept very low (as evident by SORA),

While for cost of labour, due to constant policy mistakes by China, India, South Asia and our Southeast Asian Neighbors, Singapore has a ready pool of cheap migrant labour workers to pick among countries. If one country is doing relatively well, there are 5-10 other countries to choose from. This has constantly held up because the political leaders in the above are preforming as incompetent and/or corrupted.

This leaves cost of land which can be kept artificially high as the other 2 factors' cost are kept extremely low.

Will this hold up? In my view, likely yes for the next decade because only one neighboring country has started to improve, while the rest continue to be corrupted or have economic malaise on their hands to handle.

<Not vested with a large proportion on Singapore REITs (in fact, less than 2% of my portfolio), but I have come to realise why Singapore's land cost and buildings have remained stubbornly high. My views: we have many incompetent government in this region, which also explains why South East Asia (ex Singapore), is one of the poorest region in the world>

[specuvestor]

Hi CY09 just to say that actually if we look at 3rd world countries (ie those that gained sovereignty after 2nd world war) most of the ASEAN countries actually did better. But people tend to compare with Singapore which is quite non- ordinary and cause resentment in other countries with a 既生亮 何生瑜 kind of frustration, and probably not a good general comparison per se.

But I do agree Singapore property is the root of inflation in Singapore. When you have $1m HDB it is not hard to work backwards the salary required and hence the cost of service and hence rental and hence a cup of kopi. MAS maintaining a strong SGD policy will just encourage more hot money flows while the imported COGS is not the real problem in SG. Hence I think government should look at reducing LTV ratio to reduce leveraged gains and also look to reduce CPF portion for 2nd houses and private

[weijian]

CML (Corporate Monitor) has published part 1 of a total 4 parts piece on S-REITs/Trusts.

I remember many years ago, there was a sustained public debate on what benchmarks should mgt/performance fees be calculated off from. Should it be deposited property? Distributable income (DI)? Dividend per share (DPU)? Rate of DPU increase? Should there be an incentive fee for asset investment/divestment? I vaguely remember that every benchmark had potential pitfalls and was not perfect.

At present, a first S-REIT with an internally manager has emerged, ie. Alpha Integrated REIT. It will be interesting to observe its TSR performance down the road.

SINGAPORE REITS & BUSINESS TRUST SECTOR Overview and The Hard Truth of Fees

Unitholders of REITs/BTs ought to scrutinise the fees paid to the managers, because these fees reduce the distributions that could otherwise go to the Unitholders. As we shall see, such leakage can be substantial. The reasonableness and structure of fees matter, because they indicate how the sponsor manage its interests versus those of unitholders.

Management fees constitute close to two-thirds of all the fees earned by the REIT and BT managers. The concept of management fee is to reimburse the managers for the basic services they provide, but such a fee now constitutes a significant portion of revenue and net property income of REITs/BTs. Our study finds that, where management fee is pegged to deposited property, fees can be as high as 18% of revenue (e.g., Keppel REIT), or at least high single digit. Where management fee is pegged to distributable income (usually 10%), it amounts to at most 5-6% of revenue. Still high, but significantly lower.

The third report of the REIT/BT series will focus on the practice of managers opting to be paid in units instead of cash. This matters because it causes dilution of distributions to unitholders in the future. We will demonstrate that the argument of interest alignment of such a practice is weak.

We will then examine the issue of whether the distributions from REIT/BT amount to a return on capital, or return of capital. To put it simply, does the REIT/BT create value that more than offsets the very substantial fees that are paid to the managers? The mental picture for unitholders is to think of a REIT/BT as a money machine. Unitholders put capital in during IPO and subsequent equity offerings. They then receive distributions, and the managers get paid. The money that goes back to unitholders by way of distributions (after netting off substantial fees) should be greater than the money unitholders put in, by a suitable margin. Unfortunately, this often is not true in S-REIT/BTs. We will examine this in the fourth report of this series.

Unfortunately, this is before we consider the impact of performance fee, acquisition fee, divestment fee, etc. As we shall see in the second report of this series, such fees add up, and they are structured in ways that are advantageous to the sponsors and not aligned with the unitholders.

https://corporate-monitor.org/singapore-...h-of-fees/

[weijian]

Unfortunately, this is before we consider the impact of performance fee, acquisition fee, divestment fee, etc. As we shall see in the second report of this series, such fees add up, and they are structured in ways that are advantageous to the sponsors and not aligned with the unitholders.

https://corporate-monitor.org/singapore-...h-of-fees/

Part 2 is out and IMHO it has underwhelmed unfortunately. Part 2 bought out valid points like high water mark and hurdle rates which are common among private funds, as factors to be included in the calculation of performance fees for public funds (eg. REITs) but there are many more that are off the mark:

CML argues a "return on capital type" of metric for the performance fee. Real estate ownership are generally "low return on capital" assets (if we include the debt as well) and so, I am not very sure how such metrics can be structured to be meaningful?

Next, CML says that acquisition fees should be calculated off the "cash outlay" and not the "purchase price" - Well, maybe one of them could start by informing their property agent that they will pay the 1% agent fee calculated off only the 20% cash down payment and not the transacted price. So for a 1 million property, the agent fee paid will be 2k instead of the usual 10k.

Finally, CML also singled out NetLink Trust as one with an internal manager + fixed management fee + no performance fees. But I would think it is setup this way because NetLink Trust is only expected to maintain a monopoly of existing fibre assets in their current form during its lease period. Rather than AEI (asset enhancement initiatives) to increase net lettable area (NLA) or trying to optimize tenant mix or RevPAR, the internal mgr at NetLink Trust is only maintaining the usefulness of the existing hardware. So while the amount of value-add among external manager group is debatable, but it is akin to comparing apples to oranges for commercial/hospitality asset mgrs. vs NetLink Trust internal mgr.

SINGAPORE REITS & BUSINESS TRUST SECTOR Pseudo-Performance and Other Fees

Meanwhile, the remaining 21 charge performance fees based on a percentage of either NPI, gross profit, or annual distributable income. CML terms this a “pseudo-performance fee” as an improvement in performance is not required for the REIT manager to earn this fee. While it can be argued that managers receive higher fees for higher NPI, the difference is not material enough to motivate managers. Even when NPI declines, a performance fee is still payable. This is grossly unfair. Instead, a return on capital type metric is fair and preferred as compared to a DPU-based performance fee. This is so because it will account for the return generated per dollar of capital employed, which measures the effectiveness of the REIT manager.

These 21 S-REITs will only pay their managers a performance fee when the current year’s DPU exceeds the prior year’s DPU, or using a similar comparison mechanism (see Table 4). Such an arrangement motivates the REIT manager to grow the REIT’s DPU, but we feel that 3 further conditions are missing – a tiered performance fee structure, a hurdle rate and the inclusion of a high-water mark.

When it comes to acquisition fees, S-REITs share similar policies and peg acquisition fees to 1% of the total purchase price of the asset. Investors should note that the “purchase price” refers to the property’s agreed value at the time of the acquisition, and does not relate to the cash outlay made by the REIT. Thus, if a REIT acquired an asset with an agreed property value of S$100 million but only paid S$50 million for it, the acquisition fee is still computed based on S$100 million (i.e. the fee will be S$1 million). Just one S-REIT (CLAS) charges 1% acquisition fee based on the asset’s enterprise value (“EV”) and not its purchase price. The EV is defined as the asset’s equity value plus any net debt attached to it. This calculation results in a larger number unless the asset being acquired has zero debt, which is rare for real estate assets. CLAS is the odd one out among the S-REITs as it is the only SREIT that uses EV rather than purchase price. This is unfair. The practice of this type of calculation, where EV is used rather than purchase price, is seen more commonly among the business trusts. Out of the 5 business trusts, 3 of them used EV while just one (FSLT) stuck with the asset’s acquisition cost. NetLink stood out as a positive exception once again with no acquisition fees charged.

https://corporate-monitor.org/singapore-...ther-fees/

P.S. I suppose as a CLI OPMI, I am definitely biased.

[owq]

Next, CML says that acquisition fees should be calculated off the "cash outlay" and not the "purchase price" - Well, maybe one of them could start by informing their property agent that they will pay the 1% agent fee calculated off only the 20% cash down payment and not the transacted price. So for a 1 million property, the agent fee paid will be 2k instead of the usual 10k.

I was confused by this part as well, but I believe CML is not referring to the cash outlay in terms of downpayment but rather the proportion of asset value acquired; e.g. acquiring 25% of a property should have a fee calculated on 25% of the property value rather than 100%.

The beef they have is with AGPC acquired by KIT in 2022. From the financial statements, the acquisition cost was 336m, yet the acquisition fee was 22m, a far cry from 1%. Note that 49% of the entity was being acquired at a cost of USD15.5b with a group of investors. KIT certainly did not acquire 49% of the entity. So why is the fee 22m? It's something I'm puzzled about and I could not find a good reason for that.

In comparison, looking at FCT's NEX acquisition in 2024, they acquired 24.5% of NEX at a cost of 532.1m with an acquisition fee of about 5.2m. NEX was valued at 2127m in total. So FCT actually paid a fee based the proportion they acquired. This is contrary to what CML said: "Thus, if a REIT acquired an asset with an agreed property value of S$100 million but only paid S$50 million for it, the acquisition fee is still computed based on S$100 million (i.e.the fee will be S$1 million)."

Can someone explain this discrepancy?

[weijian]

hi owq,

Yes, in the article, CML did also mention the "fee based on % of asset acquired". But then again, CML also bought enterprise value (EV) into the picture. The formula for EV is "actual payment - cash held by the asset + debt recourse to the asset" and it is a metric frequently used in take-over of whole assets. So, I suppose CML is referring to both scenarios of (a) % of asset acquired and (b) % of equity (cash) paid for asset...It make sense for (a) but definitely doesn't pass the smell test for (b).

Next I do not think there is any regulation on the various fees to be paid although there might be a few market standards that each REIT works with, as this part 2 report has shown. I took a quick look at CICT's Oct2024 acquisition of a 50% share of Ion Orchard. The acquisition fee paid is calculated off the 50% of the fully appraised value of the property and so similar to similar to FCT's. The structure of these fees are found in each REIT's Trust Deed and hence it would be good to go and take a look at each individual REIT's trust deed to thoroughly understand the way each acquisition fee is calculated.

[weijian]

Unfortunately, this is before we consider the impact of performance fee, acquisition fee, divestment fee, etc. As we shall see in the second report of this series, such fees add up, and they are structured in ways that are advantageous to the sponsors and not aligned with the unitholders.

https://corporate-monitor.org/singapore-...h-of-fees/

SINGAPORE REITS & BUSINESS TRUST SECTOR Pseudo-Performance and Other Fees

Meanwhile, the remaining 21 charge performance fees based on a percentage of either NPI, gross profit, or annual distributable income. CML terms this a “pseudo-performance fee” as an improvement in performance is not required for the REIT manager to earn this fee. While it can be argued that managers receive higher fees for higher NPI, the difference is not material enough to motivate managers. Even when NPI declines, a performance fee is still payable. This is grossly unfair. Instead, a return on capital type metric is fair and preferred as compared to a DPU-based performance fee. This is so because it will account for the return generated per dollar of capital employed, which measures the effectiveness of the REIT manager.

https://corporate-monitor.org/singapore-...ther-fees/

Part 3 is out and it contains some detailed calculations to show the effects of DPU dilution, which is a correct observation. Having the flexibility to pay units/cash is also a very useful way to maintain DI or (temporarily) boost the REIT's yield. Nonetheless IMHO, the conclusion recommending to stop the practice of issuing units instead of cash for fees, is off the mark.

Isn't it a good thing if Sponsors increase their stake? REITs issuing units instead of cash is not too different from companies who issue either RSU/ESPP to employees or pay a certain % of director fees in stock to non executive IDs. As an OPMI, I think the ultimate alignment is having decision makers becoming co-owners (if they are not) or increase their stakes (if it is not a significant % of their own net worth).

Of course there is DPU dilution! Imagine a durian stall (pardon me because durian season is right at the door!) with 3 co-owners. Each owner owns equal stakes (so 33.3% each) and the trio agree that 100% of the earnings will be paid out. If the stall earns 3 dollars, each of them gets 1 dollar. Now all 3 owners have a decision to make - they can either inject their dollar back into the business to expand their working capital to stock up more durians OR they can take the dollar. Owner A decides to inject it back, Owner B uses the dollar to open a papaya stall and Owner C spends it on Chagee. Fast forward a few years down the road, it is inevitable that Owner A will own more than one-third and Owner B/C each less than one-third of the business. If the durian stall still pays out 3 dollars, then Owner A is going to be entitled to >1 dollar while Owner B/C will be <1 dollar each. Owner B who had used his durian payout to invest in the papaya stall may be compensated for the reduction in durian stall's earnings through the earnings from the papaya stall. As for Owner C, can he really complain about owning less of the durian stall and getting less in payout?

In summary, rather than looking at the extremes - On one end issuing units at large discounts to NAV and the other end is 100% cash, the truth is probably somewhere in between. Often than not, large discount to NAV is a sign of poor performance/poor alignment of incentives (whether attributed to the Sponsor or not) and therefore, issuing new units at such large discounts just amplifies the downward spiral. Paying 100% cash is not going to solve the issue of poor performance or poor alignment of incentives. In other words, if a Manager performs well and the Sponsor is aligned, it does not matter if 100% of fees are paid in units - All units will probably be issued above NAV, which further boosts NAV and retained cash used to reinvest at ROIICs that is > cost of equity.

An Analysis of the Issuance of Units to Pay for Managers’ Fees

It is time to stop the practice where S-REITs continually issue units instead of cash as payment for management, performance, acquisition, and divestment fees. This practice has led to steady dilution over the years and the REIT needs to generate higher distributable income just for its DPU to keep pace, because of the rise in its overall issued unit base. Worse, as many S-REITs have seen declining net property income or other earnings metrics, the units issued to their managers in prior years consume a greater share of the total distribution. In addition, the majority of S-REITs issue new units below the REIT’s NAV. Such a practice creates a second level of dilution to unitholders and will also result in a lower NAV. This creates a vicious cycle of lower NAV, lower DPU and lower unit prices.

Because of the above issues, CML recommends that REIT managers be paid fully in cash and not have the option of issuing new units as payment for their fees. If this cannot be stopped immediately, the issuance of units should be at least at NAV. REIT managers should also not be allowed to sell any of the units they have received from the issuance of units in place of cash within a period of 5 years.

Stayed tuned for the fourth report where CML explores whether S-REITs truly offer a return ON investors’ capital, or is simply providing a return OF their capital.

https://corporate-monitor.org/singapore-...gers-fees/