How the merger bid for a small, Shariah-compliant REIT became the subject of confrontational shareholder capitalism.
Singapore loves REITs. Photographer: Maverick Asio/SOPA/LightRocket/Getty
There’s a glitzy side of Singapore property: the cavernous shopping malls; the tall office buildings; the pricey condominiums; the luxury hotels; and the hospitals where rich Indonesians and Bangladeshis seek treatment and five-star customer service.
But there’s also a vibrant market at the non-sexy end of the spectrum: the warehouses, the factory sheds and, increasingly, the data centers. Their owners are industrial real estate investment trusts, which collect rent and pass it on to unitholders. It’s something that appeals to an aging population that values the certainty of dividends more than the headiness of growth.
Some landlords, like Mapletree Industrial Trust, command market prices twice their net asset values. Others, like Sabana Shari’ah Compliant Industrial REIT, or Sabana REIT, trade at a chronic discount. This column is about Sabana, and how it became a vehicle in a Swiss value investor’s campaign to make confrontational shareholder capitalism work in polite and obedient Singapore.
Sabana is among the smallest of Singapore REITs: Its 18 properties across the island-state add up to a little more than 4 million square feet. But it has historically had big problems of governance and performance. In 2017, Sabana scrapped a property purchase from its then sponsor under pressure from unitholders; the REIT manager’s chief executive officer quit.
Still, performance remained lackluster. In September 2018, Sabana agreed to sell a factory site for less than half its book value, but the buyer couldn’t secure regulatory approvals and abandoned the deal. The factory spent all last year earning nothing. A warehouse also became tenantless in the fourth quarter of 2019, shaving a few percentage points off the property owner’s low occupancy rate.
Some REITs Get All The Love
Singapore’s Sabana, a factory landlord, could never make a mark, either with tenants or with investors.
It was relief to unitholders when in June last year control passed to to ESR Cayman Ltd., a Hong Kong-based logistics firm that owned another industrial landlord in Singapore. ESR-REIT is nearly four times as big as Sabana. The change in ownership perked up the interest of Jan Moermann, a Swiss who’s acquired a reputation as an activist investor in Singapore. Assisted by its Malaysian-born, Singapore-citizen research head Havard Chi, Moermann’s Quarz Capital Management Ltd. was already building a stake because it believed Sabana had good properties that could be managed better.
Toward the end of last year, Moermann called on ESR Cayman to merge its two Singapore real-estate trusts. Both Sabana and ESR-REIT were competing in the same market for industrial property. Conflict was a possibility, even though the managers of the two trusts say they don’t share information on strategy or operations.
Moermann put a value of 54.5 Singapore cents ($0.4) apiece on Sabana shares in a cash-plus-stock deal. But when the all-stock merger with ESR-REIT was finally announced in July, each Sabana unit was implicitly judged to be worth less than 38 Singapore cents, way below the book value of 51 cents. “We’re not here to fight over who gets one more piece of salami on the pizza,” said Adrian Chui, chief executive officer of ESR-REIT. “We want the pizza to become bigger.”
The Sabana management has publicly said that swapping 100 units for 94 units of ESR is a fair deal. That’s nearly 12% more than what the trust’s investors would have got from the market on average in the two years prior to the announcement.
Swapping 100 shares of Sabana for 94 of ESR is more than what unitholders would have got on average in the stock market — not of late, though
The question for unitholders isn’t so much whether ESR is a good home, but whether they can move in on better terms or aspire for a different sanctuary. Donald Han, the Sabana manager’s CEO, is right: Small in his business is unsexy. Even with low debt, the landlord can’t grow because most assets are already pledged. However, if ESR can secure cheaper refinancing for those properties, so can another strong owner. Now that Sabana is adding a 35,000-square-feet retail and F&B component to its flagship property, dropping the Shariah compliance tag to allow tenants that deal in alcohol or pork could also be of modest help.
Scouting for suitors from around the world after the Covid-19 travel restrictions end might throw up alternatives. Conversely, it’s also possible that the pandemic dislocation, combined with Singapore’s tightening restrictions on foreign workers, will erode the value of industrial properties, hurting Sabana unitholders if they hold out. Their portfolio is too small to afford the downtime involved in costly redevelopment.
Quarz and Hong Kong-based Black Crane Capital, which own 11% of the Sabana stock between them, are prepared to vote against the current offer when a shareholders’ meeting is called. They’re also asking the current Sabana management to leave if the merger fails.
In Singapore’s West-meets-East culture, people in positions of authority are rarely challenged so openly. Yet someone needs to do it. The chief of city’s Securities Investors Association invited the managers of the two merging entities and an analyst to discuss the deal. The moderation was courteous, and the participants agreed on everything.
How can there be a market without disagreement? Thanks to Moermann’s activism, the Monetary Authority of Singapore got involved to give its views on resolving conflict in situations where competing REITs are under single control. Mak Yuen Teen, a Singapore business professor, questioned the independence of a director on the Sabana manager’s board, drawing a reply.
“We try to make our criticism as constructive as possible,” says Moermann. “From the point of view of unitholders, this merger is not a necessity at all.”
The pandemic will leave a long shadow on rents and interest rates. This matters for Singapore, where every third dollar changing hands on the local exchange is because of buying or selling in a REIT. With all the uncertainties of the post-Covid economy, the least investors expect is that someone shine a light on their behalf, not just in gleaming storefronts and condominiums, but in gloomy warehouses and factory yards. For now, that job has gone to a foreigner.
(For more on the Quarz-Black Crane campaign, and the Sabana manager’s response, click here and here.)
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
A living room with a view. Photographer: Nicky Loh/Bloomberg
Something big is missing from Singapore’s picturesque and impeccably maintained highway linking downtown with Changi A¬irport: traffic.
The collapse in international travel has hit the city-state especially hard. Borders are shut to tourists and much of Singapore Airlines Ltd.’s proud fleet is mothballed. The idea of “flights to nowhere” had even been floated — effectively three-hour sight-seeing trips that would be bundled with staycations, shopping vouchers and limousine services. Now that has been scrapped for a plan to serve lunch aboard a grounded jumbo jet, a tour of the carrier’s training facilities and home delivery of first- and business class meals.
The ability to get in and out of a nation that takes about 30 minutes to traverse has been a big draw for the more than one million expatriates who live here. Non-Singaporeans make up more than half of senior management roles in financial services. The idea of being stuck flying in circles has many rethinking the informal bargain they’ve struck with the city they call home. A big part of that was the opportunity to work in a dynamic region and experience diverse cultures and nations for a few years. In return, Singapore got talent, industrialization and unique ties to global networks, vital for a country without a hinterland or natural resources.
Singapore’s modus operandi has been to make itself a base camp for global capitalism and the people who make it tick. Lee Kuan Yew, the country’s first leader, laid out the welcome mat for multinational corporations: first for textiles, ship maintenance and petrochemicals, then for electronics, tourism and finance. Changi Airport, top-notch public transport, a commitment to education, and political stability made the city an appealing place to live. Relatively low tax rates only sweetened the deal (except for Americans, who need to pay income tax no matter where they live).
Now Lee’s vision is running into the wall of Covid-19. Singapore’s economy shrank a record 42.9% on an annualized basis in the second quarter from the previous three months, the deepest economic contraction since independence in 1965. While data point to a bounce before year-end, the government projects gross domestic product to decline as much as 7% in 2020. This has sharply refocused public discourse. Opportunities for locals are the priority.
When companies do pare headcount, they are prevailed upon to keep Singaporeans at the core of their staffing. Local press reports of legislative proceedings highlight references to a closely held list of firms on a watch list for their hiring practices. Banking and finance has fallen under heightened scrutiny. The government, which lost seats to the opposition in July’s general election, has tightened rules around employment visas for foreigners by raising minimum salaries twice this year. Figures released last week showed Singapore’s population fell slightly to 5.69 million in the year through June, the first drop since 2003. Work permit holders saw the largest decrease.
“We cannot sustain our openness if we do not provide enough opportunities for our own people,” Senior Minister Tharman Shanmugaratnam told the Singapore Summit on Sept. 14. “It is not socially or politically sustainable. No society can be blindly open.”
Singapore is slowly cranking back to life after a strict lockdown. Throngs pulse through malls and hawker centers in suburbs of central Singapore. Subway trains are often full. A pilot scheme for international executives to travel in the region — under a strictly controlled itinerary and subject to Covid testing — is in the works. Children under six are no longer required to wear a mask.
But while the government will allow more people into their offices, work-from-home remains the default. As long as that’s the case, and the airport remains effectively a no-go zone, the more folks realize they don’t actually need to be in Singapore to do their jobs. If teams across Asia can be managed by Zoom from the living room, then that living room could be anywhere.
This realization is crystallizing as the headlines splashed across Singapore’s major English-language newspaper, the Straits Times, openly debate the role foreigners play in the economy. Far from feeling welcome, expats now spend a lot of time looking over their shoulders. Employers are quietly urging them to avoid anything that might attract attention.
That’s left many wondering whether uprooting their families has been worth it. You don’t have to come to Singapore for the privilege of getting laid off. Schools fret about families packing up. And those regional offices executives are sent here to run? They need to be able to get into them.
The caricature of the European sipping a gin and tonic under a shady tree with rent and school fees taken care of, pampered by maids, is woefully out of date. Relatively few employers these days pick up the tab for housing and tuition. Relocation company staff say the glory days of the expat packages ended with the global financial crisis. With economic warfare raging between China and the U.S., and fashionable talk about the world dividing into rival blocs, is an Asian experience still the resume booster it once was? A gig here feels no more secure than one at home.
As a 10-year-old boy, the flight returning to Australia from a family vacation in Europe stopped at the old Paya Lebar airport; I remember taking in the exotic night smells and marveling at the lights of hundreds of ships anchored just offshore. As a newly minted college graduate, Singapore was my first stop on a cross-Asia trip. Living in Malaysia in the late 1990s, visits to the city-state were a balm for the haphazardness of Kuala Lumpur. I returned with a young family last year. We pay taxes, live in a middle-class neighborhood and, through our spending, try to support the economy. I hope the shatter zone of the pandemic isn’t the end of our journey together.