Urgent need for stricter rules to discourage buyout of property stocks at a severely

Urgent need for stricter rules to discourage buyout of property stocks at a severely undervalued offer

Nov 24, 2021

SINGAPORE'S private home market is buoyant and investor appetite for investment properties here is strong, amid low interest rates and the nation's safe haven status.

But listed property groups sitting on valuable real estate portfolios are trading at a substantial discount, and present regulations are insufficient to prevent controlling shareholders from squeezing minorities out at discount rates.

Changes to regulations are urgent in the current environment of widespread undervaluation.

Established profitable property groups such as Frasers Property, GuocoLand, Ho Bee Land and Wing Tai Holdings are trading at discounts to their net asset values (NAVs) of between 49 per cent and 56 per cent as at Nov 23, 2021.

Already, some asset heavy groups owning property and hotel assets have exited the local bourse.

This year, the list of privatisations includes Top Global, Fragrance Group and GL Limited - all privatised by entities linked to major shareholders. In these cases, the offerors obtained acceptances in excess of 90 per cent of shares and exercised the right of compulsory acquisition under the Companies Act to buy up the shares of shareholders who did not accept the offer.

Low barriers

Another property group that may be leaving the local bourse is mainboard-listed SingHaiyi Group. On Nov 9, Haiyi Treasure, a company owned by SingHaiyi's major shareholders Gordon Tang and his wife Celine Tang, made a voluntary conditional cash offer for all the shares in SingHaiyi at S$0.117 per share, with a view to delist.

The offer price represents a premium of 8.3 per cent over the closing price on Nov 8, prior to the announcement of the offer, and 19.4 per cent over the 12-month volume weighted average price.

But the offer price is at a 21.8 per cent discount to SingHaiyi's NAV per share of S$0.1496 as at end-September 2021.

According to the offer announcement, entities linked to the Tangs that own 78.4 per cent of SingHaiyi's shares have provided irrevocable undertakings to accept the offer.

To hit the 90 per cent threshold, the offeror needs to secure acceptances from another 11.6 per cent of shares in SingHaiyi. That works out to only 54 per cent of the rest of the shares - at which point the offeror can force all shareholders to sell their shares at a 21.8 per cent discount to book.

In some jurisdictions, regulators have tried to protect minority shareholders by ruling that shareholdings of the offeror and its associates cannot count towards the 90 per cent threshold.

This is not, however, the case in Singapore.

Currently, individuals who are controlling shareholders of listed companies can set up a special purpose vehicle to make an offer for shares. The shares these individuals own can then count towards the 90 per cent acceptance threshold.

There have been suggestions to change existing rules so as to exclude from the count the shares of individuals who are controlling shareholders.

In SingHaiyi's case, if the 78.4 per cent of shares are excluded from the count, the offeror would need acceptances from 19.5 per cent of shares, instead of 11.6 per cent, to be able to exercise the right of compulsory acquisition.

Of course, rules need to be fair to both majority and minority investors.

Should the rules change, controlling shareholders might complain it is unfair that investors holding only 2.2 per cent of shares in SingHaiyi can block an offeror from exercising the right of compulsory acquisition.

Yet, minorities may need greater protection when it comes to being forced to sell out their shares.

Significant undervaluation

With property groups, NAVs are likely to be conservative. Investment properties tend to be marked to market based on valuations done by independent valuers. Property under development tends to be held at cost, which does not capture potential profit. Assets such as hotels may be carried at cost less depreciation.

Earlier in the year, Singapore Exchange Regulation enhanced requirements on valuers to raise the standard of property valuers and property valuations. Valuers now have to fulfil certain professional qualifications and independence criteria. And valuation reports have to be in line with international standards and contain a minimum level of prescribed information.

For instance, property valuers are required to have at least five years' relevant practical experience in valuing properties in a similar industry and area as the property to be valued - to ensure familiarity with local market conditions and requirements.

Ensuring valuers do a good job matters. But it may be pointless having robust NAV figures when offerors can succeed in buying out shares from those who are unwilling to sell, at prices that represent substantial discounts to NAV.

Consider: if you held a small share in a property with a group of family members or friends, you would expect your share to be bought out based on independent valuation and not at a discount of 20 per cent or more.

Perhaps the rules should stipulate that offerors can only exercise the right of compulsory acquisition based on an offer price that represents a discount to NAV of no more than 5 per cent or 10 per cent.

CapitaLand has shown a way to address the under-valuation of listed property groups. Under a restructuring, its development business was privatised while the investment management and lodging business was listed under CapitaLand Investment (CLI). Prior to announcing its restructuring, CapitaLand traded at over 20 per cent discount to NAV. As at Nov 23, 2021, CLI traded at over 9 per cent premium to its NAV per share of S$3.07.

Most listed groups here cannot emulate CLI, which had funds under management of S$84.3 billion as at end-September 2021.

Instead, more privatisation offers for listed property groups could be on the cards. If being listed is not working out, major shareholders may reasonably be expected to consider options including privatisation.

Groups such as Frasers, GuocoLand, Ho Bee and Wing Tai have large shareholders and high quality assets, making them potential privatisation candidates.

Liquidity is abundant. Property portfolios are highly sought after - as shown by the competing offers for the non-media assets of Singapore Press Holdings. The two offers for SPH are at premiums to end-August 2021 pro forma NAV assuming the media business restructuring had been completed.

Amid the possibility of more privatisation offers, rules need to be tweaked urgently to better protect small investors from being forced to take raw deals.