Skip to main content
SpringerLink
Log in

Sponsor Ownership in Asian REITs

  • Published:
The Journal of Real Estate Finance and Economics Aims and scope Submit manuscript

Abstract

This study examines the relationship between sponsor ownership and firm performance proxied by firm value, operating cash flow, and dividend policy with Asian real estate investment trusts (REITs) in Japan, Hong Kong, Malaysia, and Singapore for the period from 2002 to 2012, focusing on both the incentive alignment effect and the entrenchment effect. Our study sheds new light on effective corporate governance for Asian REITs that are prone to agency problems. Such agency problems arise from the inequitable distribution of power to sponsors that results from the external management structure. The findings suggest that larger sponsor ownership aligns the interests of sponsors and minority shareholders and enhances the performance of Asian REITs, while such an effect diminishes as sponsors become more entrenched. We find that the incentive alignment effect and entrenchment effect are primarily driven by developer-sponsored REITs. Also evident is that the presence of institutional investors mitigates agency problems and increases firm performance.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Fig. 1
Fig. 2
Fig. 3

Similar content being viewed by others

Notes

  1. In their study on property transactions made by Japan and Singapore REITs from 2002 through 2007, Ooi et al. (2011) observe that almost one third of all the property transactions are related party acquisitions with the sponsors.

  2. Sponsors also have a tendency to keep their “trophy assets” in their portfolio while disposing of smaller properties into the REITs. In their research report, RREEF (2012) illustrates that J-REIT sponsors tend to only feed smaller properties into their REITs. While the average total assets hold by J-REITs is approximately JPY 111 billion in 2011, about 50 buildings in Japan alone are worth as much as the entire REIT portfolio.

  3. Approximately 77 % of all the related party property transactions in Japan and Singapore REITs from 2003 to 2011 are made between developer sponsors and their REITs.

  4. Other REIT markets are not chosen either due to data unavailability or immaturity of markets.

  5. For J-REITs, there may be multiple sponsors. We choose the one that owns the management team of the REIT to identify a single sponsor for each J-REIT.

  6. The SNL REIT database does not have institutional holdings for REITs in Malaysia. We supplement the missing observations with data from Factset.

  7. See Morck et al. (1988); McConnell and Servaes (1990); Cho (1998); Himmelberg et al. (1999), and Han (2006).

  8. As a robustness check, we run regressions using alternative models; random-effect flexible generalized least squares with cluster-robust standard errors and fixed-effect least-squares dummy-variables regression with cluster-robust standard errors, using the dividend payout model as an example. The results summarized in Appendix 3 confirm that the main results are robust against the choice of different estimation methods.

  9. This descriptive statistics are based on the full sample of 716 REITs. Different models have slightly different sample sizes due to missing values of independent variables.

  10. Figures of board size, independence, institutional ownership, and external block owner shareholdings are obtained from Hartzell et al. (2006).

  11. When we remove the J-REITs that have notably smaller board sizes, we document that the boards in Asian REITs are still smaller (7.52) than those in US-REITs.

  12. We show the results for REITs with banks sponsors and those with developer sponsors. There are REITs with other types of sponsors such as retail companies and railway companies. While the combined sample includes such REITs, the sample size of REITs with other types of sponsors is too small (around 50) for sub-sample regression analyses.

  13. We avoid using firm fixed effects because sponsor shareholdings change very slowly over time, meaning that any relationship between firm value and ownership is likely to be captured cross-sectionally. As a result, employing the firm fixed effect, which removes cross-sectional variation across data, is likely to obscure the relationship between sponsor shareholdings and firm value (Zhou 2001).

  14. Concerned that this positive relationship could be driven by the sample of Malaysian REITs with concentrated shareholdings, we remove them from our analysis as a robustness check and find that our results remain the same.

  15. Following Morck et al. (1988) and Han (2006), we also conduct piecewise linear regressions with breakpoints at 5 % and 25 % and find an attenuation of incentive alignment effects as sponsor shareholdings increase beyond 5 %. This result, illustrating a possible trading off of incentive alignment and entrenchment effects, is consistent with the non-linear relationship reported in the quadratic specification.

  16. Other than examining total dividend distributions, following Hardin and Hill (2008), we compute excess dividends and examine the relationship with sponsor shareholdings. Our findings (available upon request) are fairly consistent with our results for dividend yield. A negative non-linear relationship is detected between sponsor shareholdings and excess dividends, indicating that committed sponsors pay out less in excess dividends to enhance future growth opportunities.

  17. These effects are significant only with the combined sample, although the effects of the same directions are observed also with developer-sponsored REITs. We believe this is due mainly to the small sample sizes of sub-samples.

  18. See Himmelberg et al. (1999); Demsetz and Villalonga (2001); Ghosh and Sirmans (2003), and Han (2006) for more details.

References

  • Berle, A. A., & Means, G. C. (1932). The modern corporation and private property. New York: Published by Macmillan.

    Google Scholar 

  • Bradley, M., Capozza, D. R., & Seguin, P. J. (1998). Dividend policy and cash-flow uncertainty. Real Estate Economics, 26(4), 555–580.

    Article  Google Scholar 

  • Cannon, S. E., & Vogt, S. C. (1995). REITs and their management: an analysis of organizational structure, performance and management compensation. Journal of Real Estate Research, 10(3), 297–317.

    Google Scholar 

  • Capozza, D. R., & Seguin, P. J. (2000). Debt, agency, and management contracts in REITs: the external advisor puzzle. Journal of Real Estate Finance and Economics, 20(2), 91–116.

    Article  Google Scholar 

  • Capozza, D. R., & Seguin, P. J. (2003). Inside ownership, risk sharing and Tobin’s q-ratios: evidence from REITs. Real Estate Economics, 31(3), 367–404.

    Article  Google Scholar 

  • Cho, M. H. (1998). Ownership structure, investment, and the corporate value: an empirical analysis. Journal of Financial Economics, 47(1), 103–121.

    Article  Google Scholar 

  • Demsetz, H. (1983). The structure of ownership and the theory of the firm. Journal of Law and Economics, 26(2), 375–390.

    Article  Google Scholar 

  • Demsetz, H., & Lehn, K. (1985). The structure of corporate ownership: causes and consequences. Journal of Political Economy, 93(6), 1155–1177.

    Article  Google Scholar 

  • Demsetz, H., & Villalonga, B. (2001). Ownership structure and corporate performance. Journal of Corporate Finance, 7(3), 209–233.

    Article  Google Scholar 

  • Diamond, D. W. (1984). Financial intermediation and delegated monitoring. Review of Economic Studies, 51(3), 393–414.

    Article  Google Scholar 

  • Dolde, W., & Knopf, J. (2010). Insider ownership, risk, and leverage in REITs. Journal of Real Estate Finance and Economics, 41(4), 412–432.

    Article  Google Scholar 

  • Downs, D., & Güner, Z. N. (2006). On the quality of FFO forecasts. Journal of Real Estate Research, 28(3), 257–274.

    Google Scholar 

  • Friday, S. H., Sirmans, S. G., & Conover, M. C. (1999). Ownership structure and the value of the firm: the case of REITs. Journal of Real Estate Research, 17(1), 71–90.

    Google Scholar 

  • Ghosh, C., & Sirmans, C. F. (2003). Board independence, ownership structure and performance: evidence from real estate investment trusts. Journal of Real Estate Finance and Economics, 26(2), 287–318.

    Article  Google Scholar 

  • Ghosh, C., & Sirmans, C. F. (2006). Do managerial motives impact dividend decisions in REITs? Journal of Real Estate Finance and Economics, 32(3), 327–355.

    Article  Google Scholar 

  • Han, B. (2006). Insider ownership and firm value: evidence from real estate investment trusts. Journal of Real Estate Finance and Economics, 32(4), 471–493.

    Article  Google Scholar 

  • Hardin, W., & Hill, M. D. (2008). REIT dividend determinants: excess dividends and capital markets. Real Estate Economics, 36(2), 349–369.

    Article  Google Scholar 

  • Hartzell, J. C., Sun, L., & Titman, S. (2006). The effect of corporate governance on investment: evidence from real estate investment trusts. Real Estate Economics, 34(3), 343–376.

    Article  Google Scholar 

  • Himmelberg, C. P., Hubbard, R. G., & Palia, D. (1999). Understanding the determinants of managerial ownership and the link between ownership and performance. Journal of Financial Economics, 53(3), 353–384.

    Article  Google Scholar 

  • Hsieh, C. H., & Sirmans, C. F. (1991). REITs as captive-financing affiliates: impact on financial performance. Journal of Real Estate Research, 6(2), 179–189.

    Google Scholar 

  • Jensen, M. C. (1986). Agency costs of free cash flow, corporate finance, and takeovers. American Economic Review, 76(2), 323–329.

    Google Scholar 

  • Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3(4), 305–360.

    Article  Google Scholar 

  • Kaplan, S. T., & Minton, B. A. (1994). Appointments of outsiders to Japanese boards: determinants and implications for managers. Journal of Financial Economics, 36(2), 225–258.

    Article  Google Scholar 

  • Kudus, S. S., & Sing, T. F. (2011). Interest alignment and insider shareholdings in the emerging Asian REIT markets. Journal of Real Estate Portfolio Management, 17(2), 127–138.

    Google Scholar 

  • Lecomte, P., & Ooi, J. T. L. (2013). Corporate governance and performance of externally managed Singapore REITs. Journal of Real Estate Finance and Economics, 46(4), 664–684.

    Article  Google Scholar 

  • Mak, Y. T., & Li, Y. (2001). Determinants of corporate ownership and board structure: evidence from Singapore. Journal of Corporate Finance, 7(3), 235–256.

    Article  Google Scholar 

  • McConnell, J. J., & Servaes, H. (1990). Additional evidence on equity ownership and corporate value. Journal of Financial Economics, 27(2), 595–612.

    Article  Google Scholar 

  • Morck, R., Shleifer, A., & Vishny, R. (1988). Management ownership and market valuation: an empirical analysis. Journal of Financial Economics, 20(0), 293–315.

    Article  Google Scholar 

  • Ooi, J. T. L., Ong, S. E., & Neo, P. H. (2011). The wealth effects of property acquisitions: evidence from Japanese and Singaporean REITs. Real Estate Economics, 39(3), 487–505.

    Article  Google Scholar 

  • Perfect, S. B., & Wiles, K. W. (1994). Alternative constructions of Tobin’s q: an empirical comparison. Journal of Empirical Finance, 1(3–4), 313–341.

    Article  Google Scholar 

  • Pica, A. (2011). Asia-Pacific REITs – Building trust through better REIT governance. CFA Institute 2011(4), 75.

  • Pound, J. (1988). Proxy contests and the efficiency of shareholder oversight. Journal of Financial Economics, 20(1), 237–265.

    Article  Google Scholar 

  • RREEF (2012). RREEF Japan Real Estate First Quarter 2012 . RREEF Real Estate. http://realestate.deutscheam.com/content/_media/Research_RREEF_Japan_Quarterly_Q1_2012_global.pdf

  • Risk Metrics (2009). As safe as houses? Examining the corporate governance of listed REITs in Singapore. RiskMetric Group. 29 Pages

  • Stulz, R. (1988). Managerial control of voting rights: financing policies and the market for corporate control. Journal of Financial Economics, 20(1–2), 25–54.

    Article  Google Scholar 

  • Vincent, L. (1999). The information content of funds from operations for real estate investment trusts. Journal of Accounting and Economics, 26(1–3), 69–104.

    Article  Google Scholar 

  • Wang, K., Erickson, J., & Gau, G. W. (1993). Dividend policies and dividend announcement effects for real estate investment trusts. Real Estate Economics, 21(2), 185–201.

    Article  Google Scholar 

  • Wong, W. C., Ong, S. W., & Ooi, J. T. L. (2013). Sponsor backing in Asian REIT IPOs. Journal of Real Estate Finance and Economics, 46(2), 299–320.

    Article  Google Scholar 

  • Zhou, X. (2001). Understanding the determinants of managerial ownership and the link between ownership and performance: comment. Journal of Financial Economics, 62(3), 559–571.

    Article  Google Scholar 

Download references

Author information

Authors and Affiliations

  1. Department of Real Estate, School of Design and Environment, National University of Singapore, 4 Architecture Drive, Singapore, 117566, Singapore

    Cheng Keat Tang & Masaki Mori

Authors
  1. Cheng Keat Tang
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Masaki Mori
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Cheng Keat Tang.

Appendices

Appendix 1

REIT Name

Country

Type

Details

Outcome

Fortune REIT

Hong Kong

RPTs

Fortune REIT proposed an acquisition of three properties from its sponsor, Cheung Kong. Fortune REIT planned to fund this acquisition by a rights issue of HKD 1.9 billion. At the point of acquisition, Cheung Kong is a significant shareholder of Fortune REIT holding almost 40 % of the shares. The proposed transaction was unfavorable for Fortune REIT, as the net asset value per share would fall from $7.5 to $4.8 and the distribution yield would decrease from 9 % to 7.2 %. Fortune REIT was overpaying for these acquisitions as the non-prime properties were valued at overly optimistic yields.

On the day of acquisition, Fortune REIT lost about 10 % of its share value due to excessive dumping of shares by investors.

FC Residential Investment Corporation

Japan

Financing

FC Residential REIT announced that it would acquire properties from its sponsors. Ichigo group intended to finance the acquisitions via private placements. Units would be issued into a special-purpose vehicle affiliated with the sponsor at a price of 180,000 yen, which was approximately 25 % below the closing traded price and a 61 % discount to its book value.

Several investors requested to suspend the proposed property transaction, which was highly disadvantageous to existing shareholders. The REIT was forced to suspend this transaction.

Keppeland REIT

Singapore

RPTs

K-REIT proposed to sell Keppel Towers and GE Towers at $573 million to its sponsor, Keppel Land, while using those proceeds to purchase 87.5 % stake of Ocean Financial Center at $2.01 billion from Keppel Land. Questions were raised about the price paid by K-REIT for the acquisition of Ocean Financial Center as it was very much overvalued as compared to recent transacted prices.

K-REIT lost approximately 10 % of its share value on the day of announcing the asset swap.

Mori Hills REIT

Japan

RPTs Financing

Mori Hills REIT announced that it would acquire two properties from its sponsor, Mori Hill Building Co. and sell one of the properties back to its sponsor. This acquisition would be funded by private placement in which the sponsor would receive new units at 500,000 yen. This offering price was approximately 33 % lower than the IPO price and a 13 % discount from book value per share. In addition, Mori Hill was overpaying for the RPT as the transaction price was much higher than the appraised value. As a result of this transaction, sponsor ownership increased from 15 % to 30 %.

Mori Hill REIT managed to execute the transaction without investor intervention. The management indicated that the distribution per unit would not be affected by optimistic rental projections.

Macarthurcook REIT

Singapore

Financing

Macarthurcook Investment REIT (MI-REIT) faced difficulties in refinancing its expiring debts due to the subprime credit crisis in 2009. Around the same time, AIMS financial group acquired Macarthurcook Group (MI-REIT’s sponsor). Cambridge Industrial Trust (CIT) proposed the acquisition of MI-REIT to bail it out from its refinancing crisis. However, AIMS Financial Group (the sponsor) was reluctant to sell to CIT and instead chose to recapitalize. New share units raised from the recapitalization would constitute 85 % of the total units outstanding.

Severe dilution of the share value of existing unit holders occurred because of the reluctance of sponsors to divest the REIT. The recapitalization caused the share price to decline by more than 50 %. Shareholders have no specific provisions to impose control on the severe dilution.

Appendix 2

Table 7 Summary of collinearity diagnostic
Full size table

Appendix 3

Table 8 Dividend payout model with different estimation methods
Full size table

Rights and permissions

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Tang, C.K., Mori, M. Sponsor Ownership in Asian REITs. J Real Estate Finan Econ 55, 265–287 (2017). https://doi.org/10.1007/s11146-016-9577-9

Download citation

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s11146-016-9577-9

Keywords

Search

Navigation