In light of weak performances by many S-REITs, one may start to feel that some managers of these S-REITs are overpaid but underperforming.
Here we try and help you better understand how S-REIT managers are paid, and more importantly which S-REITs are worth their fees.
But first, we need to understand the REIT fee structure.
REIT fee structure: Types of fees
- Base management fees
This is usually calculated as a percentage of the REIT’s deposited properties as of the latest valuation. In Singapore, this tends to range between 0.1% to 0.5%.
This is the asset management fee and provides recurring income to the REIT manager earn for managing the properties and should be reasonable enough for them to operate effectively.
This will also incentivise managers to carry out asset enhancement initiatives (AEI), optimising the REIT’s portfolio mix, and other value-adding activities to grow the base portfolio.
- Performance management fees
This component rewards REIT managers for delivering results to shareholders. The fee’s benchmarks vary among REIT and there could be the presence of a hurdle rate.
- Acquisition and divestment fees
Acquisition and divestment fees are usually set at either 0.5% or 1% of the purchase price. Such fees encourage capital recycling. This may generate value for unitholders when properties with growth potential are acquired and mature ones divested. To benefit unitholders, these acquisitions should be yield-accretive and divestments above book value.
Does fee structure affect your total return?
Yes and No.
Obviously, a fee structure that aligns the REIT manager to shareholders and incentivises them appropriately works best. This will motivate the manager to strive for maximum return.
Performance management fees, especially with hurdle rates encourages them to add value for unitholders. This in turn affects a manager’s actions and how much risk they are willing to undertake.
A REIT’s fee structure can be weighted towards performance fees. At the extreme is a 100% performance fee and 0% base management fee structure.
Technically, if there is no hurdle rate for the fee, for a business model such as a REIT, structuring the fee to be a percentage of income may not be excessively aggressive as a REIT tends to be able to generate a high level of recurring income baring drastic circumstances like high vacancy rates or default by a large proportion of the portfolio.
The answer is simple – the S-REITs with the highest total returns are the ones that are most worth their fees. From a shareholder’s perspective, practically, there is no metric more important than total returns.
How are fees paid?
Fees are paid either in units or cash. Most REIT managers receive a mix of both as cash is required for their operations while units aligns them with unit holders.
Fees paid in unit do not reduce distributable income, providing flexibility to the REIT manager to declare a certain proportion of its fees in units, especially when distributable income requires shoring up on when share prices are low.
The best practice is to fix the amount of units as a percentage of fees, however this fee structure is not practised across the board.
Best paid S-REITs Managers?
Here’re the best paid REIT managers and their total fees, as a portion of distributable income. Rather then look at individual fee components, we look at total fees as it is more reflective of the cost to the REIT.
| S-REIT | Sector | Fees as % of Distributable income | Fee amount ($’mil) | 5 Year Total Return (%) | 10 Year Total Return (%) |
|---|---|---|---|---|---|
| Lippo Malls Indonesia Retail Trust | Retail | 42.7% | 10.2 | -92% | -91% |
| Mapletree Logistics Trust | Industrial | 20.5% | 89.1 | 83% | 138% |
| Digital Core REIT | Data Centre | 20% | 9.6 | N.M. | N.M. |
| Suntec REIT | Diversified | 19.1% | 61.1 | -3% | 27% |
| Dasin REIT | Retail | 17.4% (FY21) | 6.9 | -79.5% | -76% |
| Keppel REIT | Office | 23.8% | 52.7 | -5% | 1% |
| Far East Hospitality Trust | Hospitality | 16% | 9.4 | 21% | 15% |
| Frasers Logistics & Commercial Trust | Diversified | 15.8% | 48.0 | 71% | 110% |
| First REIT | Specialised | 15% | 10.3 | -65% | -49% |
| Sabana REIT | Industrial | 13.4% | 4.4 | 9% | -22% |
From the table, we can see that the best paid REITs are not necessarily the best performing REITs.
The reason is because of the fee structure. Most REIT managers receive some base fee regardless of performance.
Comparing to other asset managers, REIT managers may not be as expensive as we think. Looking at Lippo Malls, the REIT on the list with the highest fee as a percentage of distributable income, the fee as a percentage of asset under management is about 0.55%.
In comparison, fee for ETFs and unit trusts in Singapore typically range between 1% to 2.5% per annum, but can range from 0.05-3.5% per annum depending on the fund. This fee is charged for fund expenses, including management fees, administrative fees, and operating costs.
So which S-REITs are worth their fees?
We compiled the list of top performing REITs in Singapore based on their total returns in the last 10 years and 5 years and identified a similar trait.
Top performers based on a 10 year total return are well known REITs such as Keppel DC REIT, Mapletree Industrial Trust and CapitaLand India Trust.
Top performers based on a 5 year total return comprise mainly the same names.
Fee structure incentivises performance!
Fees have to be structured appropriately to align REIT managers to shareholders and avoid conflicts of interest.
In a case where REIT mangers feel that their fees are inadequate, REIT managers may feel like they need to carry out acquisitions or divestments to earn additional fees.
For example, if the base fee for a property is 0.25% and the acquisition fee is 1%, doing an acquisition would allow the manager to earn 4 years worth of asset management fees for that property in one swift transaction. At the same time, if the acquisition is funded by an equity fund raising, this allows the manager to grow its asset under management and scale up further.
This is why any change to a REIT’s fee structure would require shareholders approval, otherwise the situation would quickly go out of control if REIT managers can change their fee structure as and when they wish to.
Perhaps, not only should top management’s remuneration be tagged to long term shareholder’s returns but management fees should also be tagged to long term shareholders returns.