Raising the bar on the REITs arena

Putting Malaysia on the map

On a regional comparison, M-REITs are well on its way to putting Malaysia on the map for foreign investments.

M-REITs are poised to be buoyant and it will position Malaysia as one of the top REIT market in the region due to the defensive nature of Malaysia’s market and sizable market capitalisation.

This, on the back of a strong ready pool of investor and the potential of REIT players to grow their asset portfolio beyond their current size by way of acquisition locally or regionally, will serve to boost optimism in the sector.

“Though smaller in market capitalisation compared with Singapore, Malaysia remains one of the most diversified REIT market with offerings from office, retail to plantation and healthcare,” said RAM’s gen­eral manager for Structured Finance Ratings Department, Siew Suet Ming.

“The domestic market also has an added advantage of being host to three Islamic REITs, giving foreign investors seeking for syariah-compliant investments further invest­ment options.”

LaBrooy revealed that cur­rently, there are 194 REITs in Asia with a market capitalisa­tion of US$224.7 billion despite REITs being relatively new to the region.

“Their success in that short time has been remarkable. Malaysian ranks fifth with 16 REITs and a market capitalisa­tion of US$8.1 billion. We are still relatively small in comparison to Australia, Japan, Singapore and Hong Kong,” LaBrooy ap­pended, adding that as a result, we were not a very liquid and deep market.

“However, we are now being noticed by the foreign investment houses with our strong growth platforms, liquidity in the larger REITs and dividend pay outs.”

LaBrooy said M-REITs have a distinct advantage over the rest in that it has Islamic REITs as part of its REIT offering and this is a unique in the world of REITs.

“Our ability in attracting funds from the Islamic funds all over the world can turn this into an exciting and unique asset class in the future as well as encouraging promoters from the Middle East to list their assets as REITs here in Malaysia under our very well structured syariah rules.

“This coupled to our strong Islamic capital market will lead to a new growth trajectory for M-REITs.”

Local players: Outstanding performance so far

The market capitalisation of the M-REIT industry has grown significantly this last year with the listings of Pavillion REIT and IGB REIT.

With the diversity it offers, the domestic REIT market has the potential to grow to be one of the larger REIT markets in the region (the top three markets being Ja­pan, Singapore, Hong Kong).

RHB Research’s Loong was of the opinion that M-REITs will gradually move up to investors’ radar regionally, given the in­creasing size of new REITs.

“If KLCC Property does inject its assets into a REIT, the REIT is expected to have a size of more than RM8 billion – the largest in Malaysia,” she said. “These larger REITs should have better liquidity, as compared to the REITs with an asset size of less than RM1 billion, and hence will attract the interest from institu­tional investors.

The next possible big REIT listing may involve super prime real estate held under KLCC Property Holdings Bhd, which include the Petronas Twin Tow­ers and the Suria KLCC mall. If this materialises, it would add to the depth and breadth of the Malaysian REIT market.

With the potential listing of KLCC and some other listings we can expect the market capitalisa­tion to reach RM40 billion within the next two years.

“For M-REITs, the yields are also expected to be more stable, given the closed economy of Ma­laysia, as opposed to the more opened Singapore economy, and depressing economic conditions in Japan,” Loong highlighted.

Taking a recap on the listing of two major players Pavilion REIT and IGB REIT, RAM’s Thong said both REITs exhibited strong demand with IGB REIT oversubscribed by 21.75 times and Pavillion REIT by 28 times during their respective initial public offerings (IPOs).

This underscored the robust­ness of REITs among Malaysian investors.

“From a valuation standpoint, IGB REIT was listed at an indica­tive yield of 5.1 per cent compared with 6.5 per cent for Pavillion REIT’s at the time of the latter’s IPO,” he said.

“However, these figures are not directly comparable given that Pavillion REIT’s listing was done almost a year earlier and the mar­ket’s appetite for M-REITs have grown since then,” he advised, noting that in 2012, M-REITs as an asset class have outperformed the KL Composite Index.

“Both REITs offer strong arguments for better yield per­formance in view of potential future acquisitions (Fahrenheit 88 and Mid Valley Southpoint in the immediate future). We also see potential for strong upward rental revisions for both in 2013 with IGB REITs having more than a third of its NLA up for revision, and 67 per cent of Pavillion REITs’ NLA up for renewal in 2013.”

Thong further added that both companies’ current balance sheets were also fairly conserva­tive with less than 30 per cent gearing – providing sufficient headroom for the REITs to gear up for any future acquisition.

Meanwhile, LaBrooy from MRMA was of the opinion that the decision to include MidValley Megamall and Gardens into IGB REIT’s portfolio underlines the success of the listing on Bursa this year.

“It was very tightly priced but investors saw a golden opportu­nity of owning one of the most successful malls in the country and the offering was oversub­scribed.

“Despite listing at the higher end of the pricing scale of RM 1.25 per share, it made a solid debut it RM 1.37 per share for a 9.6 per cent premium.”

Retail sector on the rise

Another key boost to the per­formance of REITs lies within the retail sector. HwangIM’s Gan stated that Malaysia, as one of Asia’s emerging markets, will continue its nation building exer­cise which in turn will translate into steady growth rate.

This, he said should, result in rising affluence and higher disposal income of its population as the nation grows and hence culminate into strong domestic consumption.

“Domestic consumption will translate to, among others, growth in the consumer retail property sector,” he affirmed.

“A point to note: retail sales in Malaysia have been expanding at an eight year compounded an­nual growth rate (CAGR) of 19 per cent, largely driven by domestic consumption as well as tourism. And, the stability and defensive nature of our capital market re­mains an attraction to the local and foreign investors.”

This is further bolstered by government assistance to the public in the form of Bantuan Rakyat 1 Malaysia (BR1M 2.0), civil servants’ bonus and salary increment, said RHB Research’s Loong, which will have a direct positive impact on retail REITs, as the retail REITs will receive more “turnover rent” income, which is driven by the tenants’ sales income.

“However, with turnover rent only accounting for about two to five per cent of the retail REITs to­tal income, focus is still mainly on growing tenants’ base rents.”

One key note pointed out by MRMA’s LaBrooy is that not all malls are on equal standing as each retail mall have their own unique offerings.

“The retail market is doing very well but not all malls are equal. Fortunately those in the M-REIT portfolios are all the best of the best and stand to gain from the increased retail traffic,” he said.

“There is a lot of competition coming on-stream, but the impact is minimal. Popular malls will always do well. Sungai Wang is a typical example by being on top of its game for nearly 30 years,” he cited as an example.

Supporting this was Malaysian Retail Association’s projections of a six per cent retail growth for 2012 to RM88.2 billion.

RAM’s Thong and Siew both agreed that the local retail market has been performing well and will continue to be supported by strong local conditions such as stable employment, higher income growth and continued private consumption.

“That said, we are watch­ing the supply of retail space carefully as it might lead to an oversupply in the market,” they cautioned.

“In 2012, new mall comple­tions are expected to add around 2.7 million square feet (sq ft) of net lettable (NLA) area in Klang Valley. Some of these new malls are sizeable (mean­ing exceeding 500,000 sq ft) like the Setia Eco City (740,000 sq ft) and Paradigm Mall (680,000 sq ft).

“The significant new sup­ply has already translated into lower occupancy rates in Selangor. Retailers will have to choose carefully over where they would want to be represented although demand will continue to be strong for established retail assets.”

Despite the added supply, Thong and Siew believed that prime REIT retail assets – such as Sunway Pyramid, Pavillion and Mid Valley – will continue to perform well as these malls have established markets and benefit from good catchment area and proven perform­ance.