REIT ASIAPAC
COVER STORY
SPRING
In Asia, it is normal for
sponsors to inject assets into
REITs; PAG’s offer was too low.
Spring’s KuickFit UK asset
shouldn't be worried about the unit price because there is an
inverse correlation between yield and unit price. They attempted
to justify this with the argument that if you buy something for
$100 which has $10 of income; if it goes down to $50 in value,
it's still $10 of income. The yield will be 20% as opposed to 10%,
and that's a good thing, and we'll forget about the fact you just
lost $50. If that is the narrative, I wonder if they would have been
able to get the IPO underway in December 2013.
our interest in the vehicle.
However, under Hong Kong’s regulatory regime, that's not
technically regarded as a conflict such that it would preclude
you from voting your interest, despite the clear conflict. From
a governance perspective, you should be applying best-in-class
governance and using the institutional model as a reference
point.
There was recently a similar situation in
Singapore where despite a bid by a group of
investors to change a REIT’s manager failing,
it resulted in real change inclusive of the CEO
of the manager leaving shortly after. Do you
think you will see real change with Spring
regardless of the outcome of the bid?
Are there any other players or investors
at the centre of the ecosystem who you
think has a role to play to drive change?
I should be clear that the regulator is very good to deal with. This
was a first for the Hong Kong market, and we found them to be
open, direct and engaged. I think the issue itself is there is a need
for regulatory reform as opposed to how it is administered.
If the board and particularly the independent board members
have unitholders’ interests in mind and have the experience in
these circumstances, I imagine that that should be a discussion
that's occurring because it is the worst performing REIT among
the constituents of the Hang Seng REIT Index in terms of unit
price performance. It arguably has some of the best underlying
assets—certainly the two Beijing office towers which represent
about 90% of the current gross asset value. It's in a grandfathered
structure. Additionally if you look at some of the actions around
related party transactions, you've had very poor governance. If I
was a board member, I would be asking the CEO to justify very
clearly how he's going to rectify that.
My view is you've got to continue to cultivate broader
institutional ownership in the capital markets and particularly
in the REIT space. Implicit in institutional ownership if you get
an experienced investor helping to hold account managers for
underperformance, a direct result is you embed some level of
market protection for moms and dads who are invested in these
REITs.
Most state finances now are under some pressure, and there's
this growing retirement age population. Retirement savings are a
bigger and bigger issue now both socially and economically. A lot
of people own shares as part of their retirement either directly or
indirectly. So, there's a real imperative to make sure that capital
markets provide an effective means to deliver returns over
the longer term. In Hong Kong, where you don't have a large
degree of institutional ownership, you're not creating a market
environment that introduces a level of market accountability that
would help deliver on some of those outcomes longer term.
Secondly, I'd be questioning what their real track record in
investing is. They were going to recommend to unitholders to
issue units to a proposed vendor (Huamao Focus Limited) at
$3.372, which is highly dilutive and well below the $5.30 that
we offered. There was a graph that essentially implied that you
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If you consider our performance relative to our peers, we are
trading at about a 40% discount to a NAV (Net Asset Value), in
line with many other property investment companies in Hong
Kong. This may not be satisfactory for some of our investors, and
while we would like to narrow the gap, the emphasis has always
been to improve the REIT’s cash flow.
PAG has outlined
certain problems
at Spring REIT and
believes management
is responsible for
losing value for
unitholders. What
is your perspective
on these matters?
Specifically, on conflicts of interest,
what do you say to the related party
transactions being a red flag?
Kevin Leung,
Spring
REIT has
always
been responsive to investor
feedback. At the same time, our
approach to managing the REIT may not be fully in line with the
expectations of everyone given our diverse investor base. Our
mandate as manager of the REIT is to produce stable dividend
The sponsor-REIT model is typical in Asia. If you look at the
transactions undertaken by REITs in Hong Kong and Singapore, it
is common for sponsors to inject properties into the REIT with a
view to grow the portfolio or the asset-base of these REITs. This
benefits the REIT and its unit holders by providing a pipeline of
Spring REIT Managing Director
“If you consider our performance relative to peers, we are trading at
about a 40% discount to a NAV (Net Asset Value), in line with many other
property investment companies in Hong Kong. This may not be satisfactory
for some of our investors, and while we would like to narrow the gap,
the emphasis has always been to improve the REIT’s cash flow.”
distributions with the potential for long-term growth. Cash flow
is our foremost concern. However, certain investors, like PAG,
pay more attention to asset values. off market deals. REITs are subject to more stringent regulations
than traditional listed companies, and it is virtually impossible for
us to buy anything without unitholders’ approval.
The way we evaluate ourselves is to consider the long-term
cash distributions we make to our investors. We have focused
on improving the performance of our properties. We have two
major assets: a Grade A property located in Beijing and a UK
asset that makes up about 5% of the total value of our portfolio.
The occupancy rate at our Beijing office property has always
been about 94%, and since our listing, the rental yield has been
about 6.4%. Our annualised distribution yield is about 7%, and
since our IPO (Initial Public Offering), we have paid out 100% of
our total distributable income. From this perspective, I believe
we've done a reasonable job. I think the key question should be in fact when we acquire
properties from our network and affiliates, do we have a good
corporate governance framework in place to ensure that there
are no conflicts of interest and that the transaction is done at
arms’ length.
For our UK transaction, it was put to vote at an EGM. And while
the asset was referred to us by a friend, the property wasn't
purchased from a connected party or a related party.
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