Malaysia REIT

REITs set to ride on recovering economy

PROPERTY is a relatively stable sector for investment, and with the better economic outlook, real estate investment trust (REIT) players are already looking to cash in on the improved sentiment.

AmanahRaya-REIT Managers Sdn Bhd chief operating officer Abas A. Jalil claims that many investors are already starting to look at the REIT market positively.

“Previously, people perceived that Malaysian REITS had slow growth in returns,” he tells StarBizWeek.

“However, with the announcement of Sunway City Bhd (SunCity) and Qatar-based REITs, you will see more activities in the local (REIT) scene, which will in turn become the engine for the overall property growth in Malaysia.”

According to Maybank Investment Bank’s recent research note, the asset size of Malaysian REIT market could double to RM18bil by year-end due to three impending listings – the SunCity REIT (with an asset size of RM4bil), CapitaRetail Malaysia Trust (up to RM3bil) and Malaysia’s first cross-border REIT, the Qatar REIT (RM1bil).

Abas believes that the local REITs will spark more interest among investors and the sector will become more vibrant.

“The old perception that the REIT market is not active is no longer there. Investors’ understanding of this segment has also changed,” he says.

“Now they (investors) are seeing REITs as an alternative form of liquid investment that provide a very stable yield as well as a potential upside in terms of pricing.”

AmanahRaya-REIT is the manager for AmanahRaya Real Estate Investment Trust (ARREIT), which is targeting to grow its total assets to RM1.5bil in the next two years, from RM748mil currently, by injecting new properties into its portfolio and improving the value of its existing assets.

Abas, who is confident of achieving this target, says ARREIT has a good mix of tenants with good occupancy rates. It will acquire Selayang Mall in Selayang, Selangor, and Dana 13 in Ara Damansara, which are expected to boost its total asset value to RM1bil.

“ARREIT was listed in February 2007 with an asset size of RM345mil. In three years, we have reached RM1bil. I think this is a good achievement,” he adds.

He says ARREIT also became the first local to be rated by Standard & Poor’s in early 2010, earning a rating of BB+.

Axis REIT Managers Bhd chief executive officer Stewart LaBrooy says the local REIT market has often been criticised by foreign funds as lacking depth and liquidity, adding however that the new listings will make it more attractive.

Axis REIT announced early this year it was targeting to grow its total assets to at least RM1bil from RM907.7mil as at end 2009. LaBrooy says the target is achievable.

“We have also announced our first acquisition for 2010 – a RM30mil logistics warehouse at the Port of Tanjong Pelapas in Johor. This brings our total assets under management to RM957.78mil and we should be on track to cross the RM1bil target before year-end,” he says in an e-mailed response.

Axis REIT Managers is the promoter of Axis REIT. Its strategy currently is to acquire office and industrial assets that are syariah-compliant, focusing on properties in the Klang Valley, Johor and Penang, says LaBrooy.

“We have just disclosed our first-quarter dividend of 3.7 sen, which is much higher that our peers in the Malaysian market. We are on track to improve on last year’s performance as our recently refurbished Quattro West and Shah Alam SADC 1 welcome new tenants,” he says.

Hall & Chadwick Asia Sdn Bhd chairman Kumar Tharmalingam believes that the REIT market is looking buoyant and recommends it to anyone looking for stable returns.

“The REITs purchase quality assets and the investments are mostly in commercial buildings. These buildings are mostly in the city centre and the tenancy rate is always good,” he adds.

He says REITs are defensive stocks with long-term capital appreciation, adding that he is optimistic about the Qatar-based REIT.

“I think the prospects are good. The country has good oil reserves and is not affected by the world economy. The only problem is that the property is overseas and the investor needs to travel to Qatar to see them.”

REIT players hope for better year

After two quiet years in the local real estate investment trust (REIT) market, industry players are hoping for a better year in 2010 through more active retail interest, asset expansion plans, and entry of new players.

According to Malaysian REIT Managers Association (MRMA) protem committee chairman Stewart LaBrooy, news of some existing REITs’ plans to grow their portfolios after a two -year hiatus is encouraging.

Quite a number of REITs have plans to expand their asset portfolio, with expansion by UOA REIT, AmanahRaya REIT and Al-Aqar REIT to involve new investments of RM1bil.

He said REITs would have better upside yields accretion potential if they had steady portfolio expansion through regular strategic asset acquisitions.

On whether raising enough funding for their asset expansion plans still posed a challenge to REITs, LaBrooy said: “Since the global financial crisis, there has been a game change on the regulatory environment that is helping REITs and capital markets cope with issues like faster capital raising and more self regulation.”

“Although under existing Securities Commission (SC) rules REITs can place out new units of only up to 20% of their unit base and it can be done only once every 12 months, the SC is prepared to grant specific approval to REITs to raise additional capital within 12 months on a case to case basis,” he told StarBiz.

It is possible that with the upcoming capital raising plans and new listings, there is potential for the market size to be increased to RM18bil from the current RM8bil.

LaBrooy said if the listing of a few more sizeable REITs took place by this year-end, it would further add to the depth and liquidity of the market.

The upcoming REITs include the Sunway REIT which is estimated to have asset value of around RM4bil and Malaysia’s first cross-border REIT, the RM1bil Qatar REIT.

“The coming onstream of these new players will inject a lot of liquidity into the market. This will create more excitement in the REIT sector in terms of size and asset class diversification and should place REITs on the radar of more local retail investors and larger foreign funds,” added LaBrooy, who is also Axis REIT Managers Bhd chief executive officer.

Currently, retail investors only account for 10% to 15% of the total REITs’ market capitalisation of close to RM6bil. The biggest portion comes from institutional investors who account for close to 60% and REITs promoters at 25%,

To promote greater trading interest and volume for REITs, the target is to raise the retail portion to 40% of the market capitalisation.

“With the huge liquidity in the local system now, there is huge potential to expand the retail interest for REITs,” LaBrooy said.

He added that retail investors were generally ill informed of the benefits of investing in REITs. “Investor education is essential and as a result the MRMA, has undertaken to conduct an investor outreach programme. So far we have conducted public roadshows in Penang, Ipoh, Klang Valley and Malacca. Our next roadshow will be held in Kuching on May 8.”

LaBrooy said to make REITs more popular with the retail investor, there was a need for more liberalisation on the regulatory front and the removal of the withholding tax for individuals.

Currently, both local and foreign retail investors have to pay 10% witholding tax to the Government.

He said the recently established MRMA, with nine out of the 11 REIT managers as members, would engage the regulators to overhaul the prevailing regulations and speak as an industry body on tax issues affecting REITs in time for the 2011 budget.

On challenges ahead, LaBrooy said: “The biggest challenge for local REITs is to reach a size of US$500mil and grow beyond this. This is the minimum requirement if we are to attract foreign funds to our market and has to be an aggressive strategy for each manager.

“To achieve this, the REITs have to have four conditions in place – stock price that trades at a premium to net asset value (NAV), so that capital can be raised in a non- dilutive manner; an identifiable pipeline of new assets to acquire; market yield that is achievable at the time of acquisition; and a recovery in the bond market so that new sources of financing can be obtained without reliance on bank lending,” he pointed out.