ALIGNMENT OF INTEREST IN S-REIT COMPENSATION STRUCTURES: A COUNTERFACTUAL ANALYSIS

Abstract

Agency issues are present in externally-managed REITs in Singapore, and the compensation mechanism is under scrutiny for being partially responsible for the misalignment of interests. This dissertation examines 3 different management compensation structures of 33 Singapore REITs (S-REITs) over the period of 2002 to 2015. The key objectives of the paper are to (1) examine the relationship between DPU performance, management fees, and performance fee structures, and (2) determine if changes to the base and performance fee structure improves the alignment of interest between managers and unitholders of S-REITs. I find that management fees correlate negatively to DPU performance, consistent with the arithmetic relationship in DPU computation, but also revealing the lack of alignment between DPU and fees. Of the 3 performance fee structures (Non-DPU, DPU- linked and DPU-based), DPU-linked REITs are found to have higher DPU growth. Furthermore, there is empirical evidence showing improved alignment between managers and unitholders under the counterfactual scenarios (DPU-based performance fee structure and base fee structure pegged to both Assets under Management and Distributable Income).