In the current challenging times in the listed property sector, shareholders are becoming more vocal about their opinions, especially when it comes to external managers. The recent activist battle at PRS Reit has brought this issue to the forefront, with concerns raised about the renewal of an external investment management contract potentially hindering a takeover deal. Despite the resolution of the battle with the appointment of activists to the board, the underlying issues remain.

External managers are a common feature in the listed property sector, with half of all UK-listed Reits utilizing their services. These managers are often favored by smaller and younger vehicles, particularly those that emerged in the aftermath of the financial crisis. However, concerns arise when these external contracts are lengthy and come with high fees, as they can act as barriers to potential takeover deals. If a Reit with an external manager were to be taken private, the new owner would have to compensate the manager for lost fees, impacting their returns.

While external contracts can be beneficial if structured properly, with fees tied to market capitalization and shorter contract lengths, they can also pose challenges. For potential takeover targets like Impact Healthcare Reit, Life Science Reit, PRS Reit, Residential Secure Income Reit, Urban Logistics Reit, and Warehouse Reit, the presence of external contracts could complicate acquisition plans.

It is crucial for Reits to carefully consider their external management contracts to ensure alignment with shareholder interests and avoid potential obstacles to future deals. By implementing controls such as market cap-based fees, manager investment in shares, and shorter rolling contracts, Reits can mitigate the risks associated with external management arrangements.

In conclusion, the issues raised in the PRS Reit activist battle highlight the importance of transparent and shareholder-friendly external management contracts in the listed property sector. By addressing these concerns and implementing best practices, Reits can enhance their attractiveness to potential investors and pave the way for future growth and success.