JTC’s choice of Reit manager raises questions

Mapletree is likely to engage a PR drive to dispel any notions of conflicts of interest in its stable

JTC Corp has finally announced its selection of manager for a proposed real estate investment trust (Reit) that will hold some high-rise, ready-built properties that JTC is divesting.

However its statement, issued earlier this month, announcing the appointment of Temasek subsidiary Mapletree Investments to set up and manage the new Reit begs several questions.

What happened to JTC’s supposed earlier choice of Australia’s Goodman group, which had been widely reported in the Australian media as having clinched the job of the new Reit’s manager – a piece of market talk which JTC had never denied? What brought about a change in JTC’s mind in the preceding few weeks before it made its decision public?

Did adverse equity-market conditions make it difficult for Goodman to proceed with the proposed acquisition of the assets with a view to listing a Reit within a stipulated timeframe, believed to be end-2008?

JTC has said that Mapletree was chosen ‘after a rigorous selection process’ and that ‘all proposals were evaluated based on individual merit against an objective set of criteria’.

But some market watchers would like to have more details of the reasons that led a Singapore government agency to select a fully-owned Temasek unit for the job of Reit manager after receiving ‘quality submissions from a wide range of international and local players’.

There’s also another interesting set of questions being raised: Will Mapletree’s appointment as the JTC Reit manager create conflicts of interest within the Mapletree stable, given that the group has a range of interests involving similar asset classes?

Going forward, to what extent will the various Mapletree or Mapletree-managed entities compete for acquisitions?

Ahead of the initial public offer for the new Reit – planned for mid-2008, depending on market conditions – Mapletree’s management will no doubt be tackling these issues and making clear to the market exactly how the group is delineating its various interests.

Broadly, there are two areas with potential conflict of interest. The first is between the group’s listed logistics Reit, Mapletree Logistics Trust, and the new JTC Reit.

The second is between the privately held Mapletree Industrial Fund and the new Reit.

Let’s take a look at the first. Technically, MapletreeLog invests in logistics assets whereas the new JTC Reit will hold industrial properties like flatted factories and a few business park buildings. The lay investor can be forgiven for thinking these all belong to broadly the same asset class – industrial properties.

Perhaps, what Mapletree will do is to draw a thicker line between the two asset classes, for instance, warehouses for MapletreeLog, and non-warehouse properties for JTC Reit.

Of course, some properties come with a mix of both warehouse and factory space. In that case, Mapletree will probably state upfront its criteria on defining such assets, for the purpose of deciding which Reit they will go to. Perhaps the definition will based on the predominant use of the property. Hence, if say 50 per cent or more of a property’s gross floor area (GFA) is for warehouse space, it will be classified as a warehouse property, and hence qualify for potential acquisition by MapletreeLog. But if half or more of a building’s GFA is for non-warehouse space, it can be considered for the new JTC Reit.

It will also be interesting to see how Mapletree handles the conflict between the new Reit and its existing private industrial fund. The latter currently holds about $300 million of industrial properties, not just in Singapore but also in Malaysia and China. It has the potential makings of a Pan-Asian industrial property fund. Like many private property funds these days, a natural exit for investors is to eventually float the fund as a Reit. Instead of floating this fund and having it compete with the JTC Reit, one option would be for Mapletree to roll the two into one. That is, the privately held Mapletree Industrial Fund and its assets could be folded into the new JTC Reit and the private fund’s investors be given units in the new JTC Reit in exchange. In other words, they become cornerstone investors in the JTC Reit.

Of course, this would require agreement of all parties, including JTC and the investors in the Mapletree Industrial Fund, on the pricing of assets and other issues. Because Mapletree had from the outset decided that its private industrial fund will hold only non-warehouse assets (to avoid conflict with the listed MapletreeLog), this will make it easier for Mapletree now to fold the private fund with the JTC Reit, in terms of clarity of asset class.

So moving forward, things could become clearer within the Mapletree portfolio. MapletreeLog will pursue warehouse buildings, while the new JTC Reit (or whatever it is eventually named), will hold non-warehouse properties.

Mapletree’s management will probably embark on a public and investor education programme to explain how it is delineating its various businesses to eliminate conflict of interest. Hopefully, it will be able to clear any misperceptions in the market.

All may gain if Goodman bags JTC Reit

AUSTRALIA’S Goodman group is reportedly expected to clinch the job of being the manager of a proposed real estate investment trust that will hold about S$1.6 billion of industrial properties to be divested by JTC Corp. No official announcements have been made so far.

Market watchers expect Goodman to exit an existing business in Singapore – its 40 per cent stake in Ascendas-MGM Funds Management, the manager of Ascendas Real Estate Investment Trust (A-Reit). JTC’s subsidiary Ascendas holds the remaining 60 per cent.

Some industry players suggest that giving up its stake in the A-Reit manager was probably a condition JTC laid down for Goodman if it wants to manage the new Reit.

That makes sense. For one, it removes conflict of interest. Goodman can’t be having an interest in two Singapore industrial Reit managers who may compete for the same assets and tenants.

For Goodman, instead of having to divide its energies between managing two Reits in Singapore, it may be better to focus on just one Reit.

Another compelling reason for it to choose to manage JTC’s impending Reit and give up its stake in A-Reit’s manager is that Goodman can have full control of the JTC Reit manager, unlike A-Reit, whose Reit management company it controls jointly with JTC subsidiary Ascendas.

JTC may still keep a stake in the impending Reit – perhaps to assuage concerns of some of its tenants that the statutory board’s properties divestment will be accompanied by an increase in their occupation costs. But Goodman will clearly be in the driver’s seat for this new Reit.

Market watchers also expect Goodman to be a sponsor for the new trust, holding a stake of at least 20-30 per cent, in addition to having full ownership of the Reit manager.

That gives Goodman leeway to expand the new Reit as it deems best. The new Reit can ride on the Goodman group’s substantial clout – the group owns, develops and manages industrial and business space globally and has total assets of A$37 billion (S$46.5 billion) with over 700 properties under management. In Asia too, Goodman has a substantial presence in China, Hong Kong and Japan.

Goodman’s new Singapore Reit will be able to mine Goodman’s huge customer base for tenants for its existing and future properties as they expand across Asia. Goodman could also open the door for the Reit to acquire assets in the region.

These are some of the reasons why it makes sense for Goodman to choose sole control of the new Reit manager over continuing joint control of the A-Reit manager.

Its partner in the A-Reit manager, Ascendas, too may feel freer to grow the trust after Goodman leaves.

Since its listing on the Singapore Exchange in November 2002, A-Reit has focused exclusively on Singapore. No doubt its asset size has grown impressively – from an initial portfolio of eight properties worth S$607 million at the time of listing to 78 properties totalling S$3.3 billion as at Sept 30, 2007. But eventually, relying exclusively on the home market limits A-Reit’s expansion prospects.

Industry insiders say that A-Reit has never expanded overseas because of an understanding between Ascendas and Macquarie-Goodman (Macquarie and Goodman parted ways about 18 months ago although a name change to just ‘Goodman’ was effected only last year) that A-Reit will not venture overseas, where both Goodman and, at the time, Macquarie, have considerable interests. In a nutshell, it was to avoid conflict among the three parties overseas. Ascendas may have agreed to such conditions because back then, it needed to ride on Macquarie-Goodman’s brand name in industrial property funds management. Don’t forget, back in late 2002 when A-Reit was floated, Reits were still relatively novel here.

But five years on, Ascendas has gained considerable property fund management expertise, not only managing A-Reit but setting up property funds holding Indian properties, including the Ascendas India Trust (a-i Trust) which was last year floated as Singapore’s first listed Indian property trust.

Overseas markets

Ascendas also has significant presence in China and South Korea and is fast expanding in Vietnam. Ascendas may well decide to float separate Reits holding assets in various respective overseas markets. Or it may decide to park assets in some overseas markets in A-Reit. This will be an internal strategy Ascendas will have to sort out. But at least A-Reit will no longer be fettered from overseas expansion.

So if Goodman and Ascendas decide to part ways in the A-Reit manager, that may be a good thing, for both parties, as well as for A-Reit itself.

In July last year, JTC said it had shortlisted seven candidates to manage the Reit that will hold assets to be divested by the stat board. JTC is understood to have narrowed down on the final few candidates based partly on their track records and of these, Goodman probably offered the highest value for the assets that JTC will sell to the Reit.

If JTC does eventually pick Goodman to manage the new Reit, it should help smoothen ongoing negotiations on the price Goodman will receive for selling its 40 per cent stake in A-Reit’s manager.

Goodman Group set to manage JTC Reit

JTC Corporation is set to appoint Australian-listed property and wealth management company Goodman Group to manage its upcoming real estate investment trust (Reit), sources say.

The news follows last month’s report in the Australian Financial Review that Goodman Group beat competitors – including Singapore’s CapitaLand and Mapletree Investments – to become the manager of Singapore government-owned JTC Corporation’s upcoming trust.

Other names in the running included Challenger Financial Services Group and CapitaLand subsidiary Australand, both of which are listed on the Australian stock exchange, the report said.

The report also said that UBS, Goldman Sachs and DBS are in line to underwrite the offer.

Industry players said the Reit’s initial property portfolio is expected to be worth more than $1 billion.

When contacted by BT, JTC said that the selection is still ongoing. JTC said in July 2007 that it would announce the winning manager and underwriter by the end of that year.

‘We are in the process of selecting the Reit manager and we will give updates at the appropriate time,’ said a JTC spokeswoman.

Goodman already has substantial assets in Asia, including a 40 per cent stake in the manager of Singapore-listed Ascendas Real Estate Investment Trust (A-Reit).

Goodman is looking to expand in the region, market watchers have said. In mid-2007, Macquarie and Goodman ended a partnership that began in 2001. Macquarie paid more than A$730 million (S$922.4 million) to divest its investment in Goodman.

JTC, Singapore’s biggest industrial landlord, said last July that it will divest some $1.4 billion-$1.6 billion worth of assets and focus its attention on strategic developments with a longer payback time.

The bulk of the assets to be sold will be pumped into a Reit, chief executive Ow Foong Pheng told reporters at the time.

JTC also said at the same time that it has short-listed seven Reit managers and would announce the winning manager by the end of 2007. The Reit was scheduled to be listed on the Singapore Exchange (SGX) in the second quarter of this year.

A-Reit, Singapore’s second Reit, was set up by JTC unit Ascendas five years ago. The trust has since expanded by acquiring industrial buildings.