Floating Button
Home Capital REIT Watch

Do ROFRs have virtues?

Goola Warden
Goola Warden • 7 min read
Do ROFRs have virtues?
Many ROFRs and sponsor pipelines have worked well for REITs. On the internal vs external debate, performance is a result of management and asset quality rather than structures
Font Resizer
Share to Whatsapp
Share to Facebook
Share to LinkedIn
Scroll to top
Follow us on Facebook and join our Telegram channel for the latest updates.

During his keynote speech at the REITAS Annual Conference 2025 & Regional REITs Forum on Sept 16, Tan Boon Gin, CEO of Singapore Exchange Regulation (SGX RegCo), acknowledged calls to be less “prescriptive” despite SGX’s disclosure-based regime. However, he notes that the calls to be less prescriptive on the use of “right of first refusal” or ROFR do not extend to REITs.

Tan is treading carefully into a topic that has been subject to debate over the years. In the 2000s, when REITs were relatively “young”, some market-watchers and activist investors viewed ROFRs and pipelines from sponsors as conflicts of interest, where sponsors offered their unwanted properties to their REITs.

Tan says in his speech: “Conflicts of interest are inherent in every REIT structure, as the REIT sponsor may own properties or come across new properties that fall within the investment mandate of the REIT. Our current approach is to prescribe that conflicts be resolved by giving the REIT the first right of refusal where a sponsor has a property to offer.”

“What we hear is rather than being seen as overly prescriptive, the ROFR has its virtues when it comes to REITs. First, it gives confidence that the interests of our REITs will always be prioritised. Second, the ROFR is attractive to investors because the REIT is assured of a pipeline of properties from the sponsor. In short, the ROFR is a feature of our REIT framework that has made it successful,” Tan explains.

During City Developments’ (CDL) results briefing on Aug 13, group CEO Sherman Kwek was asked what the hurdles are for listing a commercial REIT. He replied that it was the lack of a pipeline.

Kwek says: “What’s important when you’re listing a REIT is not just what properties you’re going to seed it with if you’re a sponsor, but more importantly, the pipeline for that REIT. It’s not that easy to get a strong pipeline of office properties in Singapore. We have some very big REITs, and they have done very well; they’ve grown a lot in scale. For us, at least, for a commercial REIT, we ourselves don’t have enough office or retail properties in our portfolio.”

See also: No silver bullet, but silver linings exist in data centre financing

In addition, without a pipeline, a CDL commercial REIT may have to pay aggressive prices for third-party properties, which would be priced at low capitalisation rates, Kwek says.

ROFRs from the view of experts

How do analysts view ROFRs? Vijay Natarajan, vice-president, real estate and REITs, RHB Bank, says: “A ROFR pipeline for a REIT in our view provides an option to acquire an asset and some visibility on the pipeline and growth trajectory for the REIT, especially in markets where it’s hard to develop, compete and acquire assets such as Singapore.”

See also: Time to return to office, says Brookfield; can S-REITs benefit?

It isn’t just a pipeline that S-REIT sponsors commit to, but also an agreement to backstop any financing needs. For instance, when CapitaLand Integrated Commercial Trust (CICT) had an equity fundraising (EFR) for the acquisition of ION Orchard from CapitaLand Investment (CLI), the latter gave an irrevocable undertaking to subscribe for its total allotment of new units in the preferential offering.

The ION Orchard acquisition required an EGM where the sponsor was unable to vote, but only independent unitholders voted. Hence, REITs have guardrails in place should unitholders or the manager decide that the pipeline or ROFR asset is not suitable for the REIT.

ION Orchard performed better than the underwriting last year and contributed to CICT’s 3.5% y-o-y growth in distributions per unit (DPU) in 1HFY2025.

Keppel DC REIT (KDC REIT) has had the experience of acquiring the best assets from its sponsor, as well as acquiring challenging assets from a third party.

During KDC REIT’s EFR in November and December 2024, its sponsor committed to a sponsor subscription. Additionally, Keppel is developing a KDC SGP 9 at the same data centre campus where KDC SGP 7 and KDC SGP 8 are located. These two assets were acquired by KDC REIT in December 2024 and underpinned KDC REIT’s 1HFY2025 DPU growth of 12.8% y-o-y. KDC SGP 9 is likely to be a pipeline asset for the REIT.

“A quality ROFR pipeline and if acquired at the right time and price will enhance the overall quality of a REIT portfolio over time and potentially attract greater institutional capital, especially in current market conditions where private funds are gaining popularity,” Natarajan points out. The EFRs for both CICT and Keppel DC REIT were very well covered. In August, CICT’s placement for the acquisition of CapitaSpring was upsized and still 4.9 times covered.

Other factors also play a role, including the interest rate cycle, the cost of equity, the cost of debt, and sponsor support.

For more stories about where money flows, click here for Capital Section

Often, ROFR and pipeline properties may work out better for the REITs because the property manager is familiar with the assets.

In 2021 and 2022, KDC REIT acquired three data centres in Guangzhou from an unrelated third party, where the master lessee failed to pay the rent. This led to letters of demand in 2023. KDC REIT has since made full provisions for these data centres.

There are occasions when REIT managers have said no to sponsors. In September 2019, OUE REIT declined an offer from sponsor OUE to acquire Oakwood Premier OUE Singapore because it would not be accretive to OUE REIT’s DPU.

The external manager model

Turning Singapore into a REIT hub requires sponsors willing to list their REITs on SGX and investors willing to invest in them. The external manager model has been a key incentive for listing in Singapore.

Since the Covid-19 pandemic, however, S-REITs have languished. A large part of the challenges faced by the S-REITs since 2022 was likely the accelerated rise in the US Federal Funds Rate (FFR) in living memory, from near zero to 5.5% within two years. The rate hike cycle had a high “pass-through” rate to the Singapore Interbank Offered Rates (Sibor) and Singapore Overnight Rate Average (Sora).

Since the start of this year, Sora has diverged from the US FFR by declining at an accelerated pace due to excess liquidity and the Singapore dollar’s haven status. It appears increasingly likely that 2025 will experience three S-REIT initial public offerings.

During the REITAS Annual Conference 2025 & Regional REITs Forum, there was a lively discussion on internalisation with representatives from CLI and Mapletree Investments. Both internally and externally managed REITs have advantages and disadvantages. In a presentation, George Hongchoy, CEO of Link REIT, pointed out that an internally managed REIT needs critical mass to start with.

Link REIT, Asia’s largest REIT by assets, is internally managed. In terms of assets, Link REIT’s portfolio was last valued at HK$226 billion ($37 billion), almost 40% larger than CICT’s $27 billion. However, in terms of market capitalisation, there is little between them, with Link REIT at HK$107.9 billion, and CICT at $17.7 billion. Link REIT is up 27% this year in Hong Kong dollars (HKD). CICT has gained 20% in Singapore dollars. Since the start of the year, $1 has moved from HK$5.69 to HK$6.098 as of Sept 16.

The FTSE ST REIT Index is up 10% as of Sept 16 compared to a 12% gain for the S&P/ASX 200 A-REIT Index. Interestingly, among the A-REITs, only Goodman Group is larger than CICT. CICT must be doing something right, leading to the observation that it is the assets, the manager and the cycle that affect valuation rather than the internal versus external structure.

“If it ain’t broke, don’t fix it,” once said Bert Lance, director of the Office of Management and Budget in US President Jimmy Carter’s administration. S-REITs’ structures may not be perfect, but they work.

Tan has alluded to a similar point. “There is a concern about killing the golden goose, in this case, the ROFR, which has become a competitive advantage of the REIT framework.”

×
The Edge Singapore
Download The Edge Singapore App
Google playApple store play
Keep updated
Follow our social media
© 2025 The Edge Publishing Pte Ltd. All rights reserved.