REITs in the country have grown both in depth and breadth since 2005, with high-quality REITs being well positioned to maintain popularity as an attractive defensive asset during volatile times. REITs are now gaining prominence as the new ‘challenger’ in investment circles.
In the rat race to increase net worth, individuals are constantly on the lookout for opportunities to create wealth through investments.
With a projected growth of between five to six per cent for Malaysia in 2012, coupled with the rising disposable income of the country’s population and rapid urbanisation, investors are getting more savvy in terms of searching for investment options.
Many pursue unit trusts, stocks, commodities, fixed deposits, hedge funds and so on, injecting monies with an expectation of gain after a thorough analysis of these products.
In fact, it is generally well known that the biggest asset class the average Malaysian invests in his or her lifetime is in properties.
However, all that has changed with the introduction of a different form of investing indirectly in properties, called Real Estate Investment Trusts (REITs).
The introduction of REITs into Malaysia has brought a whole new dimension to the country’s investment circles, adding special focus to the country’s property sector apart from enhancing the economy.
Since its debut back in 2005, the number of REIT players here has been growing and gaining prominence as a safer option for investment.
According to the head of equities at HwangDBS Investment Management Bhd (HwangDBS IM), Gan Eng Peng, Malaysia REITs (M-REITs) have grown in depth and breadth since 2005, fuelling his belief that high-quality properties were well positioned to maintain their popularity as an attractive defensive asset during volatile times.
“Malaysia made its debut of REITs in the stock exchange when Axis-REIT was listed in 2005,” said Gan. “Back then, the underlying assets were less varied.
“For instance, the more prominent REITs such as Axis-REIT capitalises on a combination high grade office assets in prime locations and industrial space, whilst Starhill-REIT offers top notch retail and hospitality assets in prime locations.
“Businesses in such areas tend to lock-in longer leases due to the appeal of its location and growth potential. On the other hand, the more environment-sensitive hospitality assets offer an upside during economic growth.”
A whole new ball game
The legislation for REITs in Malaysia categorises them as a unit trust, with a mandatory external management structure and at least 50 per cent of the fund’s total asset value to be invested in real estate and/or single-purpose companies at all times.
Property development of the assets under management is prohibited, but REIT managers may enter into conditional forward purchase agreements.
REITs are exempted from income tax if at least 90 per cent of income is distributed within two months of a financial year’s closure. However, dividend yields are not specified in Malaysian REIT guidelines.
With all these unique rules set in stone, REITs were emerging as a significant asset class in their own right, affirmed the chairman of Malaysian REIT Managers Association (MRMA) as well as the chief executive officer of Axis REIT, Stewart LaBrooy.
“From humble beginnings when market capitalisation was at about RM300 million in 2005, it currently boasts a market capitalisation of RM12 billion.,” he revealed.
“With the listing of Pavilion REIT in December, this should rise to RM16 billion.”
With so much value attributed to these REITs, it might appear odd to some that Malaysian REITs were still in their ‘infancy stage’.
The head of Real Estate and Construction Ratings, RAM Rating Services Bhd (RAM Ratings), Shahina Azura Halip, opined that with only six years of experience, the Malaysian REIT industry was considered to still be relatively young with much potential going forward.
“Based on our observations, the local REIT sector has not been growing as fast as some of its counterparts in Asia, with some local REITs having the same portfolio of properties since listing,” she stressed. “REITs in Singapore, in the meantime, often make active acquisitions and have already expanded their portfolio of properties overseas.”
In fact, the size of the local REIT sector paled in comparison to the likes of Hong Kong and Singapore, highlighted Shahina.
Supporting this was HwangDBS’ Gan, who compared Malaysia to Hong Kong and stated that Hong Kong began listing REITs in its stock market in 2005 shortly before Malaysia did.
“With only eight REITs in their portfolio, they have built their market capitalisation to US$12 billion in total, comprising a wide range of underlying asset mix ranging from hospitality, retail, office space, healthcare to industrial,” he added.
“However, its average yield is lower than that of M-REIT — at approximately five per cent — due to its perceived lower risk underlying assets, being a more mature capital market and nation, as well as its obviously higher liquidity that facilitates trading of the shares.”
Gan further opined that it was unfair to compare REITs between countries as it was a localised industry, sharing certain traits with the respective property sectors.
“That means it is difficult to compare a REIT from two different countries as each has its unique profile, potential and regulations amongst others. Furthermore, one should not take yield returns alone as an indication of performance.
“It should be a balance of yield, asset quality, and cost of financing, as high yielding REITs could also mean equally high financing costs or lower quality assets.”
Looking at local REIT players
To date, the country has 14 Malaysian REITs (M-REITs) with a total market capitalisation of RM12 billion, offering an average yield of seven per cent.
Of the 14 M-REITs, a few stand out by the very fact that they handle sector-specific properties in their portfolios.
These include Al-Aqar KPJ REIT (syariah-compliant focus on healthcare properties), Al-Hadharah Boustead REIT (touted to be the only Islamic plantation based REIT in the world), and Atrium REIT (with focus on logistics properties).
Some players that are fully-focused on retail are CMMT and Hektar REIT, with emphasis within the Klang Valley region.
Other well known REITs with mixed developments include Sunway REIT, Axis REIT, AmanahRaya REIT, Starhill REIT, AmFirst REIT, Tower REIT, UOA REIT and Quill Capita Trust.
These companies see a mix of retail, office, industrial, hotel or education properties in their portfolios.