You will be able to name each party in an S-REIT and say what it is responsible for.
An S-REIT has four main parties. You and the other unitholders own it, and a trustee holds the properties for you. The manager runs the REIT, the sponsor set it up, and the property manager runs the buildings. Most S-REITs have a sponsor. Where the sponsor also has a stake in the manager and sells a property to the REIT, it can be on both sides of the deal.
Darren has held units for three years in an S-REIT that owns suburban malls. He collects the distributions and glances at the results, and he had assumed that he and the other unitholders more or less ran the REIT. Then a circular arrives about the REIT buying a new mall from a company whose name is almost the same as the REIT's. He realises he does not know who is on which side of the deal. What he had missed is that the manager is owned by the sponsor. In his case the seller of the mall is the sponsor, and the buyer is the REIT, represented by a manager that the sponsor owns.
An S-REIT is a trust. When you buy units you become a unitholder, one of the beneficial owners of everything the trust holds. The REIT's income and assets belong to the unitholders as a group. You do not hold the properties directly, and neither does anyone you elect.
The properties are held on your behalf by the trustee. This is a separate company, usually the trust arm of a bank or a specialist trust company. The trustee supervises the REIT. It checks that the manager runs the REIT according to the trust deed, which is the legal document that sets out how the REIT works, what it can invest in and how fees are paid. The trustee does not make investment decisions. It acts as custodian and referee: it keeps the assets safe and can step in if the manager breaks the rules.
The manager runs the REIT. It sets strategy, chooses which properties to buy and sells, arranges borrowing, decides how much to distribute within the rules, and reports to unitholders. Almost every decision described in an annual report was made by the manager.
The manager is a separate company with its own shareholders, and the REIT pays it fees for its work. Lesson 4.3, "How the manager is paid, and why it matters to you", covers those fees in detail. Most S-REITs have a sponsor, so it is worth checking whether the sponsor is one of the manager's shareholders. In Darren's REIT it owns the manager, which is the piece he had missed.
The sponsor is usually a property group that set the REIT up. Typically it already owned properties, put some of them into the REIT when it listed, and kept a stake. Its role continues after listing in three ways. It often sells more properties into the REIT over time, which is how many S-REITs grow. It may hold a right of first refusal, a promise to offer certain properties to the REIT first before selling them elsewhere, which gives the REIT a pipeline of possible acquisitions. It also often holds a block of units, so it shares in the REIT's results.
A strong sponsor can give unitholders a pipeline of properties, expertise, tenant relationships and sometimes better borrowing terms. The conflict comes when the sponsor sells a property to the REIT. The sponsor wants a high price and unitholders want a low one. The manager negotiates for the REIT, but where the sponsor has a stake in the manager, the manager is negotiating with one of its own owners.
There are rules for this case. They include independent valuations and, above certain deal sizes, a unitholder vote. Lesson 4.4, "How MAS regulates S-REITs", sets these out. Once you know the structure, you know to look for those protections.
The property manager runs the buildings day to day. It handles leasing, tenant relations, maintenance, cleaning, security and the operating side of each property. It is paid a fee for this work. Check the annual report to see which company the property manager is and whether it belongs to the sponsor's group.
Where the sponsor's group also owns the manager or the property manager, the sponsor can sit on several sides at once: as seller of properties, owner of the manager, operator of the buildings and a large unitholder.
The annual report names every party. Near the front is the corporate structure diagram. It usually puts the REIT in the middle, unitholders above it and the trustee alongside. The manager and property manager are linked to the REIT by fee arrows, and the properties sit underneath. Work through the report in this order:
Start with the corporate structure diagram near the front of the annual report. Take the names of the manager, trustee and property manager from the corporate information page. Check the unitholdings section for the sponsor's stake. Look in the prospectus or the annual report for any right of first refusal. If the sponsor's group has a name similar to the REIT's, confirm which company plays which role. Company names within the same group are often very close. In any deal with the sponsor, look for the protections: independent valuations and, above certain sizes, a unitholder vote.
In the activity you will draw that structure yourself for one S-REIT, with each party named, which will make it much easier to see who sits on each side the next time a circular like Darren's arrives.
Open one S-REIT's annual report and draw its structure. Label the sponsor, manager, trustee and property manager by name.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).