In brief

A recent recapitalisation of a Singapore listed real estate investment trust (S-REIT) has highlighted a number of important issues for any future recapitalisation of S-REITs.

  • Concerns in Singapore about conflicts of interest make it unlikely that the same S-REIT manager will be permitted to be the manager of more than one S-REIT that invests in the same asset class.
  • Currently, an acquirer of an S-REIT has no right of compulsory acquisition of minority unitholders (or ‘squeeze-out’) as applies to takeovers of companies in Singapore.
  • Until the new ‘squeeze-out’ provisions in the Securities and Futures (Amendment) Act 2009 commence, it is likely that any consolidations or amalgamations of S-REITs that occur in Singapore will be of a consensual nature.
  • Greater certainty would be provided if there was regulatory clarification of whether the Singapore Takeover Code can apply to hostile mergers of S-REITs.  

Overview

The global financial crisis created headlines for listed real estate investment trusts (REITs), and the S-REIT market was no exception.

The events of late 2009 involving MacarthurCook Industrial Reit (MI) and Cambridge Industrial Trust (CIT) saw MI being recapitalised, despite lively opposition from certain minority unitholders.

These events have highlighted three important issues relevant to any future consolidation of S-REITs:

  • the Monetary Authority of Singapore (MAS) appears unlikely to allow the same S-REIT manager to be the manager of more than one S-REIT that invests in the same asset class;
  • currently, an acquirer of an S-REIT cannot take advantage of a right of compulsory acquisition of minority unitholders (or ‘squeeze-out’) that applies to takeovers of companies; and
  • it is uncertain whether the Singapore Code on Take-overs and Mergers (Takeover Code) can actually be applied to the hostile merger of two S-REITs.

Manager of more than one S-REIT

In a mature REIT market like Australia it can and does occur that a REIT manager is the manager of more than one REIT. Appropriate procedures are put in place to manage conflicts of interest, such as having a separate fund manager for each REIT.

In Singapore, an S-REIT manager may only manage more than one S-REIT with the prior consent of the MAS.

CIT held nearly 10 per cent of the units in MI. CIT had requisitioned a meeting of MI unitholders to vote on removing the current manager of MI and replacing it with CIT’s manager. This requisition occurred after the MI manager had convened a separate meeting of MI unitholders to vote on what was known as the AIMS-AMP recapitalisation proposal.

CIT’s manager subsequently announced that it had been informed by MAS that MAS would not consent to CIT’s manager also acting as manager of MI, due to concerns that MAS had about conflicts of interest because each of CIT and MI invested in the same asset class (namely, industrial property).

Following this announcement, and despite strong opposition from certain MI unitholders, the AIMS-AMP recapitalisation proposal ultimately prevailed by a small majority at MI’s unitholder meeting.

No ‘squeeze-out’ right on an S-REIT takeover

The Securities Industry Council (SIC), the body that administers the Takeover Code, issued Practice Statement 2007 which extended the ambit of the Takeover Code to S-REITs. Although Practice Statement 2007 provided for regulatory control in relation to the takeover of S-REITs, it failed to clarify whether an acquirer of an S-REIT could take advantage of any right of compulsory acquisition (or ‘squeeze-out’) that applies to takeovers of companies under section 215 of the Companies Act (Chapter 50 of Singapore) (Companies Act) in order to privatise an S-REIT.

To clarify this ambiguity, the Securities and Futures (Amendment) Act 2009 (Act) was passed by the Singapore Parliament. The Act included new provisions similar to section 215 of the Companies Act, for the compulsory acquisitions of minority unitholdings, so as to facilitate the privatisation of S-REITs. However, these new ‘squeeze-out’ provisions in the Act have yet to commence and there has been no indication by the MAS as to when the provisions are likely to commence. When these provisions do commence, an offeror who is making a general offer for units in an S-REIT will be able to compulsorily acquire the units of the dissenting minority if the offeror has obtained acceptances of more than 90 percent of the units offered for.

Until this part of the Act commences, an acquirer of an S-REIT cannot compulsorily acquire any remaining minority unitholders.

Hostile merger of S-REITs

A merger of two S-REITs may be effected by a trust scheme. This involves an amendment being made to the target S-REIT’s trust deed to give effect to the merger.

SIC’s Practice Statement 2008 extended the Takeover Code to a merger of two S-REITs by a trust scheme. However, it remains uncertain whether, in practice, the Takeover Code can meaningfully be applied in the case of a hostile merger of two S-REITs.

Conclusion

Until the new squeeze-out provisions in the Act commence, it is difficult to foresee any future consolidation or amalgamation of S-REITs occurring under the current regulatory framework in Singapore, other than where the parties act consensually.

Despite the technical difficulties involved in one S-REIT taking over another S-REIT, greater certainty would be provided to S-REIT participants if the new squeeze-out provisions in the Act were to commence and there was clarification of the application of the Takeover Code to hostile mergers of S-REITs.