Directors' property buys: Building up confidence

Their support of own property firm's projects keeps investors assured

CAPITALAND disclosed recently that its group president and chief executive officer Liew Mun Leong had paid about $3.74 million for a penthouse on the 23rd level of The Interlace, a development at the junction of Depot Road and Alexandra Road.

Having directors of property firms snap up units is not unusual. Many transactions are not picked up in media reports even though the property companies have disclosed the purchase on the Singapore Exchange website.

Property consultants see such purchases by directors and interested persons as a vote of confidence in the project.

Ngee Ann Polytechnic real estate lecturer Nicholas Mak said: 'When the market is hot, directors and their immediate family members usually get onto the VVIP list and are able to pick the choice units.'

He added: 'On the other hand, when the market is slower, or the sale of the project is not progressing as fast as expected, some directors may buy units, and sometimes even at a bullish price, to give confidence to buyers and investors.'

Under Singapore Exchange listing rule 910, the sale of a unit developed by a listed company to its own director must be disclosed, partly because directors may get a discount. The disclosure of the purchase will inform shareholders about the terms a director has received.

In essence, such disclosures and the review of the purchase terms by the company's audit committee are to show that the sale has not hurt the interests of the minority shareholders or the company, for example, by the sale of a unit at a rock-bottom price to the director.

Indeed, companies generally disclose fairly detailed information nowadays: the name of the purchaser, the relationship to the director if it is not the director making the purchase, and the price, terms and even the unit number of the project.

At the expense of an even greater loss of privacy for directors, more disclosure in this area could well be something to consider.

For instance, what about when a director sells a unit?

Currently, no such disclosure is required. The rationale is that these are open market transactions with no impact on the company involved.

However, disclosure advocates argue that in a hot market, if a director sold a unit a few months after making the initial deposit, shareholders would be none the wiser unless they had taken various tedious steps to check if the unit had been sold.

So consider this: Shareholders or other buyers might pile into the project, thinking it must be a good buy, based, at least in part, on the disclosure that a company director had bought a unit.

But in the meantime, the director or his immediate family members could well be pocketing a tidy profit, having quietly exited the project.

And they have a strong incentive for trying to sell, as the directors usually get the best pickings of the units on offer - which are likely to yield the best selling prices.

Of course, there are arguments for why disclosure of a director's sale would be going over the top.

For instance, if the unit is sold to an unrelated third party as is usually the case, the sale has no direct bearing on the listed company which is what minority shareholders would be concerned about.

Another argument is that the unit could be sold for strictly personal reasons, such as the need to raise cash. The public or investors, unaware of these personal factors, might read too much into a director selling off a unit he had just bought a few months ago.

Also, since each purchase involves large sums, it is unlikely that any one director could commit himself to many transactions, which tends to diminish the force of the case for public disclosure.

But with many of these purchases, the same group of directors is likely to be involved. As property firms have a pipeline of projects, these same buyers are likely to feature over and over again so their buying patterns would be of some interest to investors.

The sale of properties soon after purchase at the time of a launch could be seen as analogous to the sale of shares by key shareholders soon after an initial public offering.

These disclosure questions give rise to another possible change that would offer greater certainty to shareholders: encouraging companies to put a moratorium on sales by their directors until the property obtains a temporary occupation permit.

That would offer a clear assurance to investors that directors who make purchases are committed to the project.

Source: Straits Times, 14 Jun 2010