Sabana REIT : A Principal- Agent Problem ( dilemma ) ?

If you are investing in S-Reit as income investors, you will surely have heard this REIT before which is in the limelight and take centre stage in recent investing news.

No introduction required for this hot topic, with many highlighted issues such as decreasing DPU, NAV, Occupancy rate, NPI etc … which translated to below :

image credit to yahoo.finance.com

With above chart, easily, some investors might be sitting with a capital loss of more than 50% with such a price trend.

This has prompted some minority shareholders to gather force and take action in hoping to vote out the Reit Manager. Such action or “shareholder activism “ of voting out the manager might be the first in S-Reit history and unprecedented. Nobody will know if these activities will produce any desired outcome but the “courage “ and intention to uphold the right for minority shareholders is commendable , no matter how we see this kind of “minority shareholders’ activism “.

You may find and join their Facebook Group for more detail of their actions and discussion, if you happen to be a shareholders for this REIT as well :

Remove Sabana Reit Manager

Vote Out Sabana Reit Manager

Some investors may argue that: Investing is very personal and one should do their due diligent prior investing in any kind of products or stocks .” or “ Don’t blame anyone for your loss except you !” , “ There is always RISK vs Reward in any investment “,,, etc.

But I would prefer to look at it from the possibility of  “ Principal- Agents problem “ perspective, which is an old dilemma exists in our political or economic environment for long-long time.

Concept Explain: What is “ Principal – Agent Problem “

Below quoted from Wikipedia :

The principal-agent problem, in political science and economics, (also known as agency dilemma or the agency problem) occurs when one person or entity (the "agent") is able to make decisions on behalf of, or that impact, another person or entity: the "principal".^[1] This dilemma exists in circumstances where agents are motivated to act in their own best interests, which are contrary to those of their principals, and is an example of moral hazard.

Common examples of this relationship include corporate management (agent) and shareholders (principal), or politicians (agent) and voters (principal).^[2]Consider a legal client (the principal) wondering whether their lawyer (the agent) is recommending protracted legal proceedings because it is truly necessary for the client's well being, or because it will generate income for the lawyer. In fact the problem can arise in almost any context where one party is being paid by another to do something where the agent has a small or nonexistent share in the outcome, whether in formal employment or a negotiated deal such as paying for household jobs or car repairs.

The problem arises where the two parties have different interests and asymmetric information (the agent having more information), such that the principal cannot directly ensure that the agent is always acting in their (the principal's) best interest,^[3] particularly when activities that are useful to the principal are costly to the agent, and where elements of what the agent does are costly for the principal to observe (see moral hazard and conflict of interest). Often, the principal may be sufficiently concerned at the possibility of being exploited by the agent that they choose not to enter into the transaction at all, when it would have been mutually beneficial: a suboptimal outcome that can lower welfare overall. The deviation from the principal's interest by the agent is called "agency costs".

Besides the agency problem between shareholders and managers, there is also another type of agency problem: the one derived from the existence of big shareholders and small shareholders, which is quite a common phenomenon in a listed company. In the process of dividend distribution, there exists not only information asymmetry but the different influence between big and small shareholders. 

Small shareholders’ behaviours are affected by the big shareholders’ decision; in return, they can also impact the big shareholders’ decision but not significantly. Under such circumstance, the big shareholders will encroach on the interests by dividend policy

More explanation on “ Principal-agent problem “ :

From “ The Economic Times “ (here )

From Investopedia. ( here )

Agency problems arise in a variety of different contexts. For example, a lawyer is meant to act in the best interest of his or her client; managers act on behalf of shareholders; employees work for their employers; politicians represent their voters, doctors for their patients, insurance agent for their clients and so on.

Agency problems arise when the incentives between the agent and the principal are not perfectly aligned and conflicts of interest arise. As a result, the agent may be tempted to act in his or her own interest rather the principals. Conflicts of interest are almost inevitable. For example, the agent bears the full cost of putting effort into the task delegated by the principal but usually does not receive the full benefit that results from these efforts. This may create an incentive for the agent to put in less effort into the task than he or she would do if acting on his or her own behalf.

Similarly, traders or managers may take on excessive risk if they enjoy the benefits of doing so (a high bonus in case of success), but not the costs (shareholders and lenders losing a lot of money in case of failure). This type of 'moral hazard' is particularly relevant to the banking and insurance industry, and arises because the agent’s actions that lead to the increase in risk are not publicly observable.

In Sabana’s context which might be subjected to such problem, the task for minority shareholders to “Remove The Manager “ might not be easy and challenging but if it happens to succeed at the end of the day, this unprecedented event may upend the whole “agency problem” and “corporate governance “ problem facing in REIT industry, significantly.

While I might be the few “lucky one “ have made money from investing in Sabana REIT ( click here ), I do hope and pray for their success !

Cheers !!