Singapore Investors Are Polite, But No Longer Pushovers

(Bloomberg Opinion) -- Corporate bosses could always count on Singapore’s culture of obedience to herd small investors into lowball mergers or take-private deals. No longer. Shareholders are fighting back, with real estate investment trusts emerging as the battleground for activists to take on managers.

It’s a welcome development. REITs pool investors’ money and raise debt to own property. They pass on most of the rental revenue and gains on sales — after maintenance expenses, management fees, property levies and interest costs — as dividends. To the city’s wealthy but aging population, these tax-efficient investment vehicles have an intuitive appeal.

But Singapore’s favorite asset class has a governance problem. By wielding outsize influence on the managers of trusts — which are often privately owned operations —  REIT sponsors are able to push an agenda that may not always be in the best interests of minority investors. Yet, thanks to activists like Swiss value investor Jan Moermann, such maneuvers are no longer guaranteed to win. 

In December 2020, Moermann’s Quarz Capital Management Ltd. and Hong Kong-based Black Crane Capital persuaded shareholders to vote down the proposed all-stock merger of Sabana Shari’ah Compliant Industrial REIT with ESR-REIT, a larger rival. ESR Cayman Ltd., a Hong Kong-based owner and developer of logistics assets, controls the manager of ESR-REIT while being the largest unit holder in Sabana REIT. The manager of Sabana, which owns warehouses and other industrial properties, had recommended to investors that they accept the offer even though it was 25% below the book value of their shares. 

From South Korea to India, shareholder activism in Asia has tended to run into nationalist outrage-mongering. Singapore is different. While a questioning culture may be new to the island-state, openness to foreign money and ideas is ingrained. Which is why the first defeat of an undervalued Singapore REIT merger became a watershed, emboldening even local investors to adopt a somewhat more confrontational stance.

After two trusts linked to Singapore state investor Temasek Holdings Pte. announced a S$4.2 billion ($3.1 billion) tie-up last December, David Gerald, the president of the city’s two-decade-old Securities Investors Association, shot off a press statement, asking the manager if unit holders of Mapletree North Asia Commercial Trust wouldn’t be better served by only considering a merger at an offer price above net asset value. Following Moermann’s activism and Gerald’s letter, Mapletree Commercial Trust — the acquirer — added a pure-cash option to the all-scrip and scrip-plus-cash menu, effectively sweetening its offer.

Going beyond special situations such as buyouts and mergers, activist investors are shining a light on the process by which a REIT manager in Singapore arrives at any financing decision, scrutinizing it for its potential to add or destroy value. To that end, Moermann is once again engaged in a war of words with Donald Han, the chief executive officer of the manager of Sabana Industrial REIT. (It has dropped its Shari’ah Compliant tag so it can own industrial properties that don’t necessarily follow Islamic principles.)

The manager wants shareholders to approve a dividend reinvestment plan, issuance of new shares, and appointment of Charlie Chan, a former Credit Suisse Group AG trader, as an independent director. Quarz, the second-largest investor in Sabana, says in a YouTube video that it has serious doubts about Chan’s independence as he has had financial dealings with ESR Cayman, the REIT’s controlling shareholder, in the past.

Besides, according to Bloomberg data, Chan is the fifth-largest shareholder of Aims Apac REIT, a rival to Sabana in which ESR Cayman again owns the biggest stake. Han has responded by saying that Chan’s dealings with ESR Cayman took place before it became a sponsor of Sabana. Chan told the Business Times that he’s just a shareholder in Aims Apac, and not a “kingmaker”.

Moermann’s team is also asking shareholders to vote against the proposed equity dilution. As one of Singapore’s more lightly leveraged REITs, Sabana can always raise additional debt. In an e-mail reply to my questions, Han said that while the trust has “substantial headroom” to borrow, it's crucial to have more options available in order to act on new opportunities should they arise.

So far, however, Quarz’s advice to Sabana shareholders has been on the money: Since the merger fell through, the stock has given a total return of 44%, the third best among all Singapore REITs. And while the manager may be right about the need to scale up the trust, it won’t hurt to improve its track record of extracting value from existing assets. Sabana sold a six-story data center for S$99.6 million in cash in January 2019. Two years and a renovation later, 9, Tai Seng Drive had won a certificate for environmental-friendliness and was valued by the new owner at S$280 million.

Han says that data centers require high capital expenditure to develop and specialized expertise — which Sabana didn’t have — to manage them. Additionally, a Singapore government moratorium on new data centers in 2019 altered the demand-supply situation, a development that the REIT manager couldn’t possibly have foreseen. The sale proceeds were used, among other things, to add a new retail and F&B component to the trust’s flagship technology park. However, Quarz says the per square foot cost of this enhancement was even higher than building a new mall on Orchard Road, Singapore’s main shopping district. 

Whatever the outcome of the April 26 shareholder meeting, Quarz’s advocacy has already led to an improvement in how intermediaries report the votes of investors in respect to the shares in their custody. The city’s “one proxy rule” used to present a distorted picture of shareholders’ intention by preventing banks and brokers from submitting two separate aggregate values of “for” and “against” votes by their customers. The usual practice was to simply report the difference in the winning side’s favor. Now that custodians have to supply both values in the proxy form, dissent in M&A situations has a fairer shot at success. 

Next year will mark the 10th anniversary of a penny-stock scandal that sapped the confidence of Singapore investors. Over the past decade, the stock market has seen daily turnover shrink at a compounded annual rate of 1%. REITs have been a rare bright spot, and shareholders are doing their bit to protect its sheen: The increasingly keen contests over everything from price to proxy suggests that the city-state’s polite investors are no longer pushovers. But regulators have a role, too. Making REIT managers more accountable to all unit holders — and not just the sponsor — is the obvious next step.  

More From  Bloomberg Opinion:

• A Swiss Activist Stirs Up Trouble in Singapore: Andy Mukherjee
• How Singapore's Staid Firms Can Wake Up Stocks: Andy Mukherjee 
• Singapore's Top Job Is Lawrence Wong's to Lose: Daniel Moss

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Andy Mukherjee is a Bloomberg Opinion columnist covering industrial companies and financial services. He previously was a columnist for Reuters Breakingviews. He has also worked for the Straits Times, ET NOW and Bloomberg News.

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