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April 2011 issue 11 COVER STORY Liquid Returns From Property POLICY Malaysian Government Spearheads Innovation SECTOR FOCUS Unlocking the MRT’s Potential
INVESTOR PREFERENCES Capitalising On Asia Pacific CEO’S SPACE Let’s Talk About Our Real Estate NEWS FLASH More Demands For Hotel IN A NUTSHELL Stable Growth For Malaysian Real Estate
LIQUID RETURNS FROM PROPERTY Malaysian REIT market enjoys stable yields
by Afiq Syarifuddin & Hazrul Izwan
The 2007 financial crisis in the United States is still affecting the Western and European markets this has seen investors around the world scrambling for investment vehicles that can generate attractive returns without them having to take colossal risks. One of these vehicles is the real estate investment trust (REIT), which is featuring prominently on investors’ radars. As a listed vehicle managed by real estate professionals, REITs explore a portfolio of income-generating properties and distribute net returns on a regular basis to provide stable yields for unit holders. Kuala Lumpur Skyline
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WHAT DOES REIT MEAN? REIT is the accepted acronym for Real Estate Investment Trust. REIT companies generally invest, manage and distribute net profit through dividend payback to investors. A REIT is traded on Bursa Malaysia with the same ease of buy and sell as a normal equity. REITs don’t just rent out and manage properties in their portfolio. A high performance REIT is developed by injecting new acquisitions into the portfolio. In some countries, REITs jointly develop property projects with other entities. This will provide even higher potential returns compared with low to moderate risk investment instruments. A REIT is a good alternative asset class for those looking for dividend-yielding investments.
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much needed liquidity to the market time the Islamic REIT guidelines were not with appraised property values of RM3.7 published yet. By virtue of converting REITs first made an entry into Malaysia billion and RM2.1 billion respectively. into Malaysia’s largest Shariahin the late 1980s with the advent of compliant real estate investment trust, Arab-Malaysian Property Trust. At that However, there is medium-term pressure Axis-REIT has now widened its investor point in time, Malaysia had established on interest rates to go up, resulting in base to include conventional as well as the framework for real estate trust a narrower spread between risk free Shariah-based funds. funds under a set of guidelines called Government bond and REIT yields. REITs Listed Property Trusts (LPTs). However, across the board are expected to be Other sector-specific Islamic M-REITs due to the lack of tax transparency and affected, which in turn could affect REIT in the market are Al-Aqar KPJ and Alfund liquidity, LPTs developed relatively returns on their arbitrage on borrowing. Hadharah Boustead, which focus on slowly in Malaysia and went into healthcare and plantation respectively relative obscurity until the Securities Having said that, Ting mentioned that as their key portfolios. Commision revised the LPT rules as the M-REIT yield gap is still attractive, relaunched them under the newly generally producing higher returns at AxisREIT Manager Berhad’s chief 7% compared with bonds at 3%. This executive officer Stewart LaBrooy said formed REIT Guidelines in 2005. reflects that M-REITs generally still have that Axis-REIT success in converting into With the new guidelines in place, the Figure 2: Asset Value in RM million as at 31 December 2010 Malaysian REIT (M-REIT) market is expanded from 1 REIT in August 2005 Sunway REIT 3,729 to 13 currently and is expected to grow CMMT 2,185 further over time. However, it is still Starhill REIT 1,619 considered small compared with other REIT markets in the region, with only 13 AmFirst REIT 1,044 players a market capitalization of RM10 Al-Aqar KPJ REIT 1,011 Billion. Of this, 10 are conventional, Axis REIT 908 while three others are ShariahAl-Hadharah Bousted REIT 866 compliant.
Figure 1: Dividend Per Unit (sen) as at 31 December 2010
REIT Dividend Per Unit (sen) Sunway REIT 6.70 CMMT 3.40 Starhill REIT 3.29 AmFirst REIT 4.81 Al-Aqar KPJ REIT 4.43 Axis REIT 4.30 Al-Hadharah REIT 6.20 Quill Capita Trust 4.18 Hektar REIT 10.30 AmanahRaya REIT 1.67 Tower REIT 5.50 UOA REIT 2.47 Atrium REIT 2.20 Source: Bursa Malaysia
Quill Capita Trust Hektar REIT
Shariah-compliant REIT market share in Malaysia
Associate Professor Sr. Dr. Ting Kien Hwa, Head of Centre for Real Estate Research Universiti Teknologi Mara, told Property Quotient that the M-REIT market is expected to further consolidated this year. Last year, two large capital M-REITs, namely CapitaMalls Malaysia Trust (CMMT) and Sunway REIT (SunREIT), were listed with a market capitalisation of nearly RM 5 billion and this added depth and
Source: Bloomberg, MPI Research
a Shariah-compliant REIT was relatively easy as being an Office /Industrial REIT its tenants complied with the ruling tjhat they should not indulge in no haram (illegitimate) activities. This Even though M-REIT is traded freely in would be more difficult to maintain the stock market, it behaves in such a should the portfolio contain retail and way that there is little fluctuation in its hospitality assets. price. Only in the event of a market crash or sudden interest rise would the price A common misconception of Axis-REIT is that it focuses on injecting singledecrease as evidenced in 2008. tenant properties. The truth, however, Although the bulk of M-REITs are is that single tenant assets tend to conventional in nature, some companies comprise around 50% of its assets under have decided to capitalise on the current management. The balances are multimarket desire for Islamic products and tenanted assets which allow a blend established Shariah-compliant REITs. of organic growth coupled with long leases. It portfolio strength is derived The first company to convert to a from three main factors: strategic Shariah-compliant REIT was AxisREIT location, tenant profile and enhanced Managers Berhad. Axis-REIT was listed value of the buildings. in 2005 as a conventional REIT as at the (continued next page) room for price appreciation. Moreover, M-REITs also represent variety through sector-specific REIT companies and diversified REIT companies.
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“M-REIT yield gap is still attractive as it generally produces a higher yield at 7% compared to bonds at 3%. This reflects that M-REITs generally still have space for price appreciation.”
For example, during the acquisition of Nestle House (presently known as Quattro West) in Petaling Jaya, a major risk identified was a short-term lease agreement with the property’s single tenant. However, the six-storey building Associate Professor Sr. Dr. with one basement car park, which commands a total of 104,392 sq feet, Ting Kien Hwa, is strategically located on Persiaran Head of Centre for Barat, Petaling Jaya, adjacent to PJ Real Estate Research (CORE), Hilton Hotel and the busy commercial Universiti Teknologi Mara (UiTM) precinct of Petaling Jaya, with excellent connectivity to two LRT stations and major bus stop and close to ample assists local pension funds’ mandate to controls over outgoings, enhancement amenities within the neighbourhood. invest in Shariah-compliant portfolios. and improvement to property value by way of renovation and refurbishment, When the tenant left in November 2009 the Manager decided to realise Asked if Axis-REIT plans to expand which will increase earnings per share this potential and embarked on a its portfolio in other jurisdictations, (EPS) and be translated to higher capital major refurbishment exercise aimed at LaBrooy reiterated that Axis-REIT will value (CV). enhancing value and improving building remain a Malaysia-centric REIT, with efficiency by incorporating green no plans to venture for assets outside Meanwhile, external growth can be building technologies, upgrading the the country. However, he concurs achieved through acquisition of more M&E facilities and giving the building that the Shariah-compliant model is yield-accretive properties essentially a modern facelift. Within three months not restricted to single country asset aimed at improving the property portfolio through diversification of reopening, the occupancy of the models. advantage and growth in the funds from building was 80% and rents were 25% Ting said interest in M-REITs could be operation (FFO). higher. spurred further through active property Similar to conventional REITs, Shariah- acquisitions by the REIT Management Adenan Md Yusof, chief operating compliant REITs are given tax incentives companies, thus increasing their officer of AmanahRaya REIT (ARREIT) and trade fairly in the marketplace. liquidity and visibility thereby pointed out his concern that Malaysia Interestingly, the appeal lies in thier attracting foreign investors. He added must further decrease its tax rates Shariah compliant nature, which clearly that opportunities arising from mergers on REIT incomes to bring them in line and acquisitions between REITs could with charges imposed by its neighbor, also be an exciting development to Singapore. In addition, fine-tuning the tax regime for foreign institutional incite investor appetite. investors can make M-REIT more Ting also mentioned that in the US, even attractive compared to similarly-taxed jails are listed in the REIT market through REIT markets such as Japan, Thailand Private Finance Initiatives (PFI). Thus, and South Korea. an introduction of infrastructureREITs could allow highways, airports, Nonetheless, investing in M-REIT is railways and other income-generating reasonably profitable as the market infrastructure to be listed. capitalisation is still small compared with other more mature markets, There is also some talk of foreign allowing more room for development. Islamic REIT listings coming in from This also ensures that returns generated the Middle East, which could positively are comensurate with the risks involved. benefit M-REIT through international property exposure. Being a country that Ting observed that the current trend has established a Shariah-compliant in the market as reflected in share framework, Malaysia definitely has movements is that investors prefer “Shariah-compliant model can a better platform compared with its sector-specific REITs compared with be extrapolated to other cities.” neighbours. diversified REITs. This is because the former perform better, as they provide REIT returns can also be improved better exposure due to being sectorStewart LaBrooy, through internal growth and external focused. Chief Executive Officer growth efforts undertaken by REIT AxisREIT Manager managers. Internal growth can be achived through rental income growth, (continued next page)
(from previous page) Figure 3: Market Capitalisation of Individual REIT markets in Asia Pacific as at 31 Dec 2010 US$’billion US$’billion 8
As mentioned earlier, M-REIT is bundled with tax incentives to help spur the market. M-REIT will not be taxed should the distributed income be more than 90% of net income. Moreover, the unit holders are only imposed a one time 10% withholding tax on dividends and need not pay personal income tax on the earnings after receiving the dividend cheque. M-REIT can also benefit institutional investors who wish to have exposure to property by providing access to direct ownership through ownership of units.
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For a brighter M-REIT future, Ting is of the opinion that with better market transparency and superior corporate governance, it will be only a matter of time before M-REIT starts to appeal to international institutional investors. He concluded that the availability of a property index and REIT index would allow performance benchmarking across the Asia Pacific thus facilitating investment decisions.
Source: Bloomberg, APREA Research
WHO IS THE FUND SUITABLE FOR?
M-REIT boasts excellent risk adjusted returns as evidenced by its very attractive yield and REIT Managers’ good corporate governance practices. Furthermore, the structure and regulatory framework of M-REITs is still not as complicated as REITs from other jurisdictions, which are laced with riskier assets such as residential properties and mortgage-backed securities. Being a relatively new market, M-REIT provides the investor an exposure to the high growth potential in Malaysia and Asia. This is largely due to Funds managed by American, Korean, European and Japanese Fund Managers are looking at REITs as an investment opportunities in Emerging Asian market as local currencies are stable and yields are better than those in mature economies like Korean and Japan.
H i s t o r i c a l l y, a c r o s s t h e b o a r d diversification, while reducing risk exposure, also generates smaller returns compared with sector-specific REITs.
M-REIT can also benefit institutional investors through the transfer of responsibilities such as conducting title searches and property due-diligences to the
Investors who seek income and capital appreciation, and plan to hold their investments for the medium to long term.
“ Malaysia must further
decrease its tax rates on REIT incomes, bringing them in line with charges imposed by its neighbor, Singapore. In addition, finetuning tax regime for foreign institutional investors can make M-REIT more attractive compared to similarly-taxed REIT markets such as Japan, Thailand and South Korea.” Adenan Md Yusof, Chief Operation Officer, AmanahRaya REIT
Investors who are seeking to benefit from investing in real estate across a wide range of sectors and countries through tradable, equity securities. A Fund tends to outperform: • In a relatively low interest rate environment, as yields on REITs may be appealing in comparison to yields on other asset classes. • In an environment of gradually rising rates, as REITs can generally benefit over the long run and can provide a hedge against inflation. A Fund tends to underperform: • In periods of rapidly rising inflation or increasing interest rates, REIT yields may not be as attractive as other asset classes.