RELATED PARTY TRANSACTIONS IN REITS: IMPACT ON THE SHARE PRICE AND COMPARISON WITH MARKET VALUATION

Abstract

The prevalence of Real Estate Investment Trusts (REITs) with sponsors in Singapore allow potential conflicts of interests to occur, particularly where related party transactions (RPTs) are concerned. As sponsors and related parties may exert a disproportionally large amount of influence over a REIT at the expense of other investors, minority shareholders have good reasons to treat RPTs with suspicion. This paper identifies and determines the extent of the adverse reactions of the stock market to RPTs through the use of data analyses and the event study methodology. Empirical results suggest that with 72% of the total transacted value among 61 RPTs arising from a small number of REITs, a potential method to prevent abuse is to encourage or mandate the reporting of additional RPT statistics by REITs. Moreover, the event study finds that in line with expectations, the market views RPT announcements negatively and reacts accordingly by bidding down the share price. In order to pacify investors and obtain shareholder approval for the RPTs, it is expected that REITs will receive a price discount to market valuation from related parties when conducting acquisitions. The findings support this conclusion as an average of 4.38% discount to valuation is found by comparing transaction prices to valuations using a sample of 51 related party acquisitions. In light of a recent public consultation exercise conducted by the Monetary Authority of Singapore (MAS) highlighting potential measures to strengthen REITs’ regulations, the issues discussed herein have become especially pertinent to the real estate industry. It is hoped that investors, regulators and REITs’ managers will be able to make use of the conclusions drawn in order to strengthen decision-making and find an appropriate balance between flexibility and good governance.