Singapore REITs: Removal of Sabana REIT Manager Has Positive Implication for Investors

Sabana REIT’s unitholders have voted to remove ESR Group as its manager and internalize the REIT management function. This move is unprecedented in Singapore HMN, but we think it has positive implications for the industry. This event occurred because activist investor Quarz Capital led the push. As ESR Group holds around 21% of Sabana REIT compared with Quarz Capital’s 14%, ESR Group only held a slight advantage going into the vote. Ultimately, we think ESR Group lost the vote because of concerns about potential conflicts of interest—ESR Group is the sponsor of more than one industrial REIT in Singapore—and the perception that Sabana REIT has underperformed its peers due to poor management by ESR Group.

We think Quarz Capital’s success bodes positively for the entire Singapore REIT industry as it will keep S-REIT managers—especially poor-performing ones—on their toes. Sponsors will also have to re-evaluate whether they are holding enough units of their REIT vehicles to defend their right to manage their REIT vehicles. In particular, recent moves to distribute units of CapitaLand Ascott Trust and Keppel REIT as dividend in specie by CapitaLand Investment and Keppel Corp. may now be seen as risky, given the reduction of units held.

That said, we think the risk of being removed as a manager is low if the investors are satisfied with the performance of the REIT manager.

We think it is still too early to tell if this will lead to further internationalization of REIT manager functions by other REITs. We think it is more likely that industry watchers will follow the development of Sabana REIT’s internalization journey. If it results in improvement of the REIT’s performance, we might see more underperforming REITs take that route, especially if an activist investor with significant holdings is willing take the lead to push for internalization.