Aligning interests in Reit fee structures

To align Reit manager and unitholder interests requires an appropriate manager fee structure. The ideal framework ensures that managers work to generate the most returns for unitholders. So how can that be accomplished? Broadly speaking, pegging fees to distribution per unit growth incentivises managers to expand and maximise DPU. But pegging fees to assets under management may encourage managers to grow the asset base even when the acquisitions are not yield-accretive.

For example, the manager may only be paid if DPU growth exceeds 10 per cent over the preceding year. It might seem that hurdle rates reward Reit managers for maximising returns to unitholders. But what if the manager doesn't think the hurdle rate is reasonably achievable? Some have called for Reit fee structure to be weighted towards performance fees. At the extreme is a 100 per cent performance fee and 0 per cent base management proposal. That's probably a bad idea. After all, the global financial crisis came about, in part, because of excessive risk-taking by investment bankers. Their typical performance bonus far exceeded their base pay. We know how that played out and we certainly do not want a similar outcome for Singapore Reits.

We may not have conclusive answers at this juncture. But there are several common principles on which we can generally agree. We favour a structure that incentivises Reit manager performance and growing DPU over the longer term, which demonstrates that principal and agent interests are aligned. Finally, the fee structure should also consider the value the capital recycling process delivers to unitholders when determining the fees paid to Reit managers.

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