By Kenneth Khoo and Hans Tjio

Recently, there has been much discussion in Singapore about the dearth of initial public offerings (‘IPOs’) and undervaluation of the share prices of many listed companies on the Singapore Exchange. Committees have been set up to address this issue. Some reasons have been postulated and good solutions have been provided. But there may be fundamental structural issues that are harder to resolve.

With IPOs, our recent working paper, ‘Prospectus Liability: HK and Singapore’, posted on SSRN suggests that laws matter far less than a rich hinterland. Accordingly, the disparity in size between the Singapore and Hong Kong (‘HK’) IPO markets cannot be explained by the minor differences in their laws. Instead, it is HK’s proximity to North Asia that provides most of the answer.

But the number of IPOs as a yearly measure of new listings can also be affected by the valuation of the existing stock of listed companies. Even Singapore companies may prefer to list elsewhere if they can obtain higher equity valuations. Economists often highlight that current valuations signal investor willingness to pay for new listings. Throwing our hat into the ring, we suggest that the problem may stem from the success of Singapore’s real estate/property market, which effectively serves as a substitute for public equities as an investment. Indeed, share prices even at the height of a bubble seldom exceed a price-earnings (‘PE’) ratio of 20 (the US market at around PEs of 25 is clearly overstretched, with Singapore around 12 and HK 15 at the end of July 2024). In contrast, the equivalent PE for property (price to rental) for residential property in Singapore is more than 50 (since net rentals are below 2%) and commercial property more than 20 (with net rentals below 5%). Since PE ratios are inversely correlated with yields, the strong demand for real estate suggests a general risk aversion among investors in Singapore, who might otherwise be expected to substitute their real estate holdings for public equities.

Additionally, a listed company carrying large amounts of real estate on its balance sheet (which are marked to market) will inevitably have a problem if these assets are perceived as overvalued by investors building a portfolio in public equities. While the argument is that real estate has always seen capital gains in Singapore to justify its high PE ratios, stock PEs also have positive expectations of future growth, or colloquially, ‘hope’ embedded in their valuations. This explains why Nvidia’s PE has hovered around 70 for a while, even as its earnings keep rising. While we are not financial analysts, our guess is that Nvidia does not carry much real estate, on a relative basis, on its balance sheet.

Langevoort has pointed out that public equities often have high valuations due to their substantial volatility. In other words, public equities are about ‘selling hope, selling risk’. However, it is difficult to see how future expectations of growth (i.e., ‘hope’) can materialise in a mature property market with property-heavy listed companies, in stark contrast to asset-light chip makers. The former is really seen as a stock of wealth which captures past growth and the latter future income growth—our High School economics teachers told us not to confuse stock with flows.

The solution to this conundrum which Singapore came up with slightly more than 20 years ago was real estate securitisation. Since then, Singapore real estate investment trusts (‘REITs’) have been enormously successful in removing commercial properties from the books of large public companies. This improved the credit ratings and reduced the capital requirements of these companies.

Nevertheless, the REIT-as-separate-entity structure is very expensive and, while it removes certain real estate assets from the books of a company, it also charges large fees which are largely incommensurate with the relatively low productivity of real estate. Constant changes are required to keep yields up (see BT, 29 July 2024, ‘Proposed MAS changes offer relief to S-Reits nearing regulatory gearing limits’). Is there a way for listed companies to offload those assets which drag down its PE ratios in a more cost-effective way and which will not be seen as detrimental to the interest of minorities?

While the paper is slightly critical of the regulatory environment and the use of coins and tokens which are a solution in search of a problem, it may be that real estate tokenisation has something to it. As Chan and Low have pointed out, however, tokenisation is not as easy as it appears in terms of security and co-ownership issues.

However, in the case of listed companies there may be a way out. This is to accept that tokens are securities and so there is no need for complex structures to avoid regulation. In the case of listed companies, section 277 of the Securities and Futures Act 2001 excludes offers of shares or bonds (which the paper explains is partly why the debt market has seen exponential growth) of companies whose shares are already listed on the Singapore Exchange from full prospectus requirements. Only offer information statements are required which are much simpler forms of disclosure, perhaps not unlike the white papers used in initial coin offerings (‘ICOs’). The section could be tweaked so that a listed company can also issue security tokens without the need for a prospectus. These real estate coins could then be traded on well-regulated platforms by investors who like property exposure. For others that do not, they would now be more willing to invest in those service, industrial, manufacturing or technology companies that can now more easily be seen as growth stocks sans their real estate.

In the longer term, if non-property listed companies continue to be undervalued, they can issue other types of digital assets, as securities, which are linked to new or exciting businesses that yet other investors might be keen on. That partitioning of old and new economy businesses within a listed company in a safer, regulated environment could perhaps work better than start-ups trying to carry out ICOs in an unregulated market where they cannot distinguish themselves from low-quality lemons.

Academics are not practical people but we, it is hoped, create some ideas that practitioners can use or discard with an open mind. As Keynes said: ‘Practical men, who believe themselves to be quite exempt from intellectual influences, are usually the slaves of some defunct economist’. Singapore’s strength has always been to play it down the middle, and not be wedded ideologically to any position.

Keywords:  Prospectus Rules, IPOs, Equity Valuation, REITs, Digital Assets

AUTHOR INFORMATION

Hans Tjio is the Director of EW Barker Centre for Law & Business and the CJ Koh Professor of Law at NUS Faculty of Law.

Email:  lawtjioh@nus.edu.sg

Kenneth is a Lecturer at the NUS Faculty of Law.

Email:  kenneth.khoo@nus.edu.sg