Do Rights of First Refusal Improve the Return of Singapore REITs?

This paper examines the Right of First Refusal clauses for 36 public REITs and Property Trusts in Singapore, one of the largest REIT markets in Asia Pacific. Until now, little study has been conducted on the topic of Right of First Refusal (ROFR), which has been widely employed to provide acquisition pipeline for Singapore REITs, as to whether this clause improves the IPO and aftermarket performance of REITs. This question leads to two issues: firstly, how much the REIT sponsors and investors recognize the ROFR clause in the IPO Price and First-day Closing Price respectively; and secondly, whether having a ROFR clause leads to sustained better aftermarket performance for REIT.Analysing the mean IPO Underpricing, NAV Premium and IPO Price/ NAV of all S-REITs show that on average, S-REITs with a ROFR clause is more underpriced as relative to NAV per unit than those without. With reference to the signaling hypothesis, this result supports the Sponsor Recognition Hypothesis that holding a ROFR clause enables more underpricing and hence is an indication of better quality REIT. The analysis also provides evidences to support that S-REITs with a ROFR clause achieve better initial return and higher NAV premium, although the statistical significance of the findings is low.Analyses of aftermarket adjusted return show no significant outperformance for S-REITs with a ROFR clause. However, it is found that S-REITs with explicitly-stated properties in their ROFR clause performed significantly worse than those without. This result is tested to account for potential wealth creation effect created through acquisitions of new properties, and the test result shows consistency with earlier findings. The study findings also reinforce the results of earlier literature on the determinants of IPO Underpricing and aftermarket Holding Period Return.The study findings also reinforce the results of earlier literature on the determinants of IPO Underpricing and aftermarket Holding Period Return.