IMPACTS OF RIGHT OF FIRST REFUSAL ON REIT IPO INITIAL RETURNS: EVIDENCE FROM SINGAPORE REITS

Abstract

This paper examines the IPO pricing mechanism of the 35 REITs in Singapore. With Singapore being the second largest REIT market, the paper aims to study the pricing mechanism of unique caveats that is embedded in certain REIT’s IPO prospectus, “Right of First Refusal (ROFR)” Rights of First Refusal is not a recent development. Yet it is an area that has not been extensively studied even by the western REIT markets. The aim behind this paper was to identify several key features of ROFRs:  Does ROFRs artificially inflate a sponsor’s ownership to the REIT apart from the ownership of shares given the additional commitment required,  Does ROFRs provide an opportunity for investors to gaze into the future acquisition pipeline and lower speculative first day trading, and  The proper definition for a REIT to be classified a ROFR REIT. Since ROFRs are additional commitment by a sponsor, it should be ideally be priced into IPO as consideration for sponsor’s continual commitment to the REIT. However, given the captive situation of S-REITs, this observation may not have been significant, but if applied into an internal management REIT market, perhaps the results obtained may have been more significant. Even so, the research will help to draw insights on S-REIT market. With underpricing being the dependent variable, a suitable proxy must be utilised to account for potential speculative trading. With initial returns of REITs soaring to as high as 50% on first day trading, it is crucial to identify if the ROFR caveat can help ease this form of speculative effects and achieve a “normal” first day trading. The uncharted waters of ROFRs also gave rise to the need to identify what is a ROFR REIT and whether ROFRs must be categorical, quantitative or qualitative in nature for a REIT to enjoy the benefits of listing as a ROFR REIT. Hence, the study also helps to draw analysis and insights on this issue.