Sunday 7 January 2024

The Disastrous Downfall of EC World REIT- Sponsor Fraud Detected And Implications.

Sponsor fraud has been detected by the management of EC World REIT. This irregularity brings us to other questions such as : How did the EC World REIT management get to know this? When did they know this? Was it before the SGX suspension on 31 August 2023 that they requested or after the trading suspension then this was released gradually? The occurrence of fraud has added further complexity to the current financial crisis facing EC World REIT. 7 points to note:

1. Let's call a spade a spade and not mince our words. This is not just a case of the Sponsor being negligent. This was done knowingly in order to secure a loan from the provincial government. In my mind, this is clearly a case of fraud being committed.  

Extraction from the Association of Certified Fraud Examiners

2. This entire fiasco also brings us to the point on why the management of EC World REIT has only now then demanded that Yuntong Property Management Co., Ltd, the property manager of EC World REIT’s properties and a wholly-owned subsidiary of the Sponsor, handover all the title deeds of EC World REIT’s properties to EC World REIT’s Onshore Facility Agent. It is either they are too slow to react or they are incompetent. This is absolutely horrendous. It is akin to waking up one morning and then finding out suddenly that your fully-paid property owned by yourself has been mortgaged by your relative whom you passed the title deed to for safe-keeping. In the first place, why would you pass your title-deed to your relative when it should have been all -along kept within one's control?

3. Also, how much more hidden can of worms is being concealed by EC World REIT?

4. EC World REIT is strangely giving me a Deja Vu vibes and reminded me of Eagle Hospitality Trust. My gut feel is that more bad news is going to be released by EC World REIT.  In Eagle case, once fraud is uncovered, this means that the entire management at the top is dubious.  

5. Personally to me, one can no longer trust the financials once there are integrity issue from the sponsor as these unfortunately also cast aspersions also over the current management team. 

6. The fact that the Sponsor is so desperate to make false representation to get the loan also means that they are in great financial distress. The Sponsor can't even save its own skin. So how will they be able to save EC World REIT? Already, the Sponsor commitment to buy-over 2 warehouses belonging to EC World REIT has fallen apart. 

7. The sad thing is that for existing investors, nothing much can be done as the REIT has already been suspended from trading. One can no longer exit their investment by selling them to other investors who are more willing to take up the risk. As per the case of Eagle Hospitality Trust, there is now a high likelihood that existing investors may end up with zero value due to fire sales of properties at the worst possible time. 

Parting thoughts
The EC World REIT financial crisis saga will most probably drag on painfully for another 2-3 years. My personal thoughts are that for overseas REITs investing, it is critical to only buy REITS from reputable sponsor back up by Temasek Holdings or established reputable sponsor that are listed on well-regulated stock exchanges. Personally, I thought that it is preposterous that the management of EC World REIT lost control of its own title-deeds.  

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  1. Hi Blade, great post breaking down the ongoing current affairs regarding EC World REIT. Was definitely not aware of it. I'm actually rather confused. From my knowledge, shouldn't the Trustee(DBS) actually be the one holding the assets (title deeds) and not the property manager/manager? What is an onshore facility agent? Additionally, wouldn't such a deal have countless due diligence being conducted given the rather large sum involved? From my understanding, the sponsor essentially "convinced" the Chinese government that they owned 100% of the title deeds of the aforementioned properties? Not too well-versed regarding all the legalities of this so would greatly appreciate it if you could shed some light! Thank you!

  2. Hi PL, thanks for dropping by. Very good questions....I am also extremely shocked and puzzled by how this whole saga can even happen in the first place.

    a. Yup.....theoretically, I also thought that the Trustee of the REIT should be the one holding on to the title deeds. Duties of Trustees are stated in the S-REIT’s trust deed which typically include ensuring compliance with all applicable laws, taking custody of the real estate assets, and protecting certain rights of unit holders. The trustee is paid a fee for providing this service. Nevertheless, there maybe China laws that the title deeds should be held on-shore.

    b. On shore facility agent simply means the agent holding on to the custody and title-deeds is not based overseas- meaning it is on China soil.

    c. On the due diligence should have been done by the local government, remember that this is China. Weird things can happen.

    d. In spite of the event that had already happened and mentioned in pt c, legally speaking, there should be no charge or power that can be exercised by the local government over the properties given that the properties belong to EC World REIT which is a distinct legal entity separated from the Sponsor. Problem here is that now, professional fees need to be paid to lawyers for them to give an legal opinion and to settle the charge over the properties. The worst part is that the bankers of EC World REIT must be wondering what other can of worms are being hidden by the Sponsor and also the management of EC World REIT- this affects the level of refinancing that the bankers are prepared to outlay or even cancel.

    Not exactly comforting for stakeholders such as bankers and unit-holders that more and more bad news are coming out of EC World REIT over the past 12mths.

    1. Wow Blade, thanks for dropping this huge chunk of wisdom! Very insightful! Seems like EC World REIT holders probably have to write off their investments at this point... Saw negative remarks regarding the sponsor so steered clear of the REIT, sending all my sympathies to holders.

    2. Hi PL, things only going to get worst from here I reckon. There are some similarities to Eagle Hospitality.


    Is this an S-chip ?

    1. Hi YX, good day. No lah....EC World REIT not really in same situation as what happened during that dark period of S-Chip which has very dubious accounting and cooking of books. EC REIT had a couple of good years from its IPO in 2016- it was the first industrial REIT to focus on Chinese “specialised logistics” and “e-commerce logistics” properties then.

      Unfortunately, the high interest rate environment means it is unable to pay its hefty interest to offshore bankers. Worst still, a substantial portion of its properties were leased to its Sponsor and the Sponsor was not able to pay rental due on them. e-Commerce properties in China apparently are not as resilient as they are portrayed to be.....very weak sponsor.

    2. I see. FinancialHorse's rules of accquisition of having strong sponsors for REIT still stands than. I didnt pick this one up when they were trading at around 0.76 in the 2018s because i dont know their sponsor.

      I almost didnt pick up AIMS APAC because I didnt know the sponsor but someone convinced me in a forum that AIMS finance is a big boy. I picked up AA reit at around 1.17 and it seem to be doing great so far though their AUD concentration is a bit of concern due to the weakening of the currency.

    3. Hi YX, good pick on AA REIT at S$1.17...that is a super good entry price you entered wor.

    4. Haha thanks. I was abit sian when it dropped further to 1.13 but hey, you cant catch the bottom. 🤣