JTC’s Choice Of Reit Manager Raises Questions

Source : The Business Times, February 13, 2008

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.