Raising the bar on the REITs arena

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Bloom from construction boom

Gan Eng Peng, HwangIM head of equities

The influx of construction projects in Malaysia fuelled by the Economic Transformation Programme (ETP) towards vision 2020 has also left an impact on REIT players, albeit small.

The construction boom seen this year has primarily been focused on ETP projects such as infrastruc­ture spending, and the Greater KL plan – both initiatives with strong multiplier and catalytic effect.

In Johor the Iskandar Devel­opment Region is attracting investments from multinational corporations and developers who see demand driven by its excellent infrastructure. It is attracting developments ranging from in­dustrial properties, hotels, offices, malls and hospitals all of which provide M-REITs a solid pipeline for future growth.

The same applies to the Klang Valley where the MRT Project and catalytic developments like the RRI land in Sungai Buloh – which will create the same opportunities for M-REITs.

“Acceptance of REIT among the local investors has been gaining strong traction recently primarily due to the booming property and construction sector, and the buoy­ant retail industry,” noted Gan of HwangIM.

A mature REIT industry is a win-win situation for its players and investors as a dynamic REIT industry encourages its players to acquire and inject yield-accretive assets into their portfolio, which in turn, pushes up REIT yields for investors.

“With its strong asset portfolio, REIT players can leverage on it for lower funding cost to acquire more assets.”

RAM’s Thong and Siew con­curred, noting that while it will not have an immediate impact to the REIT’s performance, it will add upside potential to the property market and add impetus to potential growth for the REIT sector over the longer term.

Over the immediate term though, the surge in available lettable space might add pres­sure to rental growth for REITs, particularly for those in the office sector.

“We believe that the construc­tion of new residential properties, especially within the Klang Valley area, could benefit the retail REIT players, as the increased popula­tion catchment should translate into higher shopper traffic for the retail malls,” said RHB Research’s Loong.

“However, as mentioned above, we believe that the construction of new offices could potentially have a detrimental effect on the office REITs.”

Possible challenges ahead

WIN-WIN SITUATION: Photos show KPJ Healthcare Bhd hospitals, part of Al-Aqar KPJ REIT’s portfolio. A mature REIT industry is a win-win situation for its players and investors as a dynamic REIT industry encourages players to acquire and inject yield-accretive assets into their portfolio, which in turn pushes up REIT yields for investors.

With this in mind, an obvious challenge that will arise for play­ers in this industry is in searching for further high-yield accretive malls to add to portfolios.

“Finding high yield-accretive mall at the right price with will­ing seller is not easy to come by. The situation in Malaysia now is that there are not many yield accretive malls available for sale in the market at a reasonable price,” outlined Gan. “The good ones are usually expensive or privately held.”

Siew and Thong from RAM agreed on this point, adding that at the operational level, yield compression as a result of competition for yield-accretive assets is one major challenge, so REITs would have to be clear about their growth strategy and execute it well.

“Any global headwinds in the US and European markets resulting in cutbacks in busi­ness growth could also impact Asian markets, both being a key export markets for the region,” they opined. “These could lead to further weaknesses in the offices sector which is already facing sup­ply pressure so the REIT’s tenant retention strategy will be key.”

PRIMARY FOCUS: The construction boom seen in Malaysia this year has primarily been focused on ETP projects such as infrastructure spending, and the Greater KL plan — both initiatives with strong multiplier and catalytic effect. — AFP photo

On a regional basis, Thong and Siew believed that the M-REITs policy on withholding tax was still less favourable (10 per cent for individuals) compared with other countries such as Singapore (zero per cent) – so reducing this threshold could make it more at­tractive to investors and increase retail participation.

“Additionally, stamp duty charges for property injections could also inhibit potential REITs with sizeable and large assets to enter the market.

“A more volatile equities mar­ket could also mean difficulties for emerging REITs to raise equity funds, although most M-REITs low gearing should provide them some headroom for now.

“Another challenge is the benign low interest rate en­vironment currently. REIT players have been enjoying funding at a low interest rate since the 2009, after the on­slaught of the Global Financial Crisis in 2008. Should interest rate move up, this will negatively affect the cost of funding and the industry.”

In addition, the strong perform­ance and demand in M-REIT has resulted in many investors preferring to buy and hold for the long-term. As such, it has created a relatively illiquid REIT mar­ket, whereby demand outstrips supply.

MRMA’s LaBrooy highlighted another concern for REIT players which is political instability.

“Political instability is always bad for investor sentiment. The upcoming elections can weigh heavily on sentiment. However the better REIT managers have already planned for these risks and should be able to ride the storms if they do occur.

“Anyway, in times of volatility, REITs always find favour with investors as they are only real asset backed stock available in the market.”

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