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Sunday, July 25, 2010

Malaysian REITs (Part 1)

Remember that I mentioned we first need to ask ourselves what is your investment strategy, financial goals and the risk we are willing to take for mREITs. You can recap it here: Investing in Real Estate: Real Estate Investment Trusts.

The concept of REIT is similar to Unit Trusts, they will invest, manage and distribute rental as dividends back to the investors, like you and me. REITs are traded in Bursa Malaysia so it makes it easy to buy and sell just like a normal equity. REITs are not new to the world for they have been in many other developed countries for decades providing steady fixed income.

The average returns for REIT in a developed market is around 3%-5% yield BUT in Malaysia it is still in the infant stages as our nation's property values are still a gap behind those of developed countries. Perhaps it will take 15 years to become mature. Let's compare our REIT market capitalization to other nations:
  • Malaysia REITs: USD$4.6 billion (year 2010)
  • Hong Kong REITs: USD$8.8 billion (year 2007)
  • Singapore REITs: USD$22 billiob (year 2007)

You can say that we are in a transition period from a developing country to be a developed country and this happens to be an opportunity with attractive yield rates of 6.5% to 8.5%. REITs do offer a good platform for long term investment, properties are hard tangible assets which their values will never go down to absolute zero. People like to see returns vs risks so let me put it in a simple flow chart from highest to lowest:

Returns: Equity > mREITs > Bonds > Fixed Deposit
Risks: Equity > Bonds > mREITs > Fixed Deposit
*This is strictly my opinion & solely on Malaysian REITs

Before putting our hard earned money to work, there is a screening process to be performed. One thing to be learn is that during the financial crisis in the US there were a lot of US and Australian REITs that have lost a lot of their value due to the buying of over of inflated assets using cheap loans. Using this key lesson I must say that a REIT has to be both income-safe and also capital value-safe.

Below is a summary of all fourteen mREITs listed in Bursa Malaysia. Note that I have screened out five for further analysis in Part 2.

REIT Specialization & Example
REIT Portfolio Composition
REIT DY & Debt Ratio

Sunway REIT Being the biggest matters as its large size will give it greater transparency to local and foreign investors from large funds. It has the second highest free float amongst all other mREITs of ~48% offering liquidity for investors which can spur interest. Bandar Sunway township is still growing with high population traffic flow from crowd puller Sunway Pyramid. Looking at its books, it has low gearing ratio with sufficient liquidity. Read here for more info (very in depth analysis by another blogger). 

CapitaMalls Malaysia Trust Largest pure-play shopping mall REIT in Malaysia which is sponsored by CapitaMalls Asia, the leading integrated shopping mall owner, developer and manager in the region and is a subsidiary of Singapore-listed CapitaLand. It is able to leverage upon the parent company who has a good track record in managing REITs. It has highest free float amongst all ~58%. Among two REIT giants, CapitaMalls books don't look that good & already thinking of more acquisitions. 

Starhill REIT People call it the six-star REIT having efficiently run their assets and ensure they are well maintained. It is a property trust controlled by diversified firm YTL Corp Bhd and has a free float of 49%. It is to be repositioned as a global hospitality REIT with proposed disposal of Lot 10 & Starhill to SG counterpart while it will be injected with world-renowned luxury Pangkor Laut, Tanjong Jara and Cameron Highland resorts plus heritage hotels such as The Majestic Malacca and business hotels known as Vistana chains in KL, Kuantan & PG. Its low gearing and ample assets does provide capability for more acquisitions. 

AmFIRST REIT Performance driven mainly by expansion of major tenant AmBank Group while it has recently tried to diversify through retail via The Summit Subang USJ & into hospitality via Summit Hotel. This REIT does not offer anything spectacular & has some amount of gearing. 

AL-AQAR KPJ REIT The KPJ hospital group has a niche market and is outside the normal REIT portfolio. It gets net rent from hospital operators which are run by dedicated professionals with as large as 19 hospitals under its belt. They will need to balance dividend yields to keep investor's interest depending on market conditions. I for one, is not attracted due to its current gearing ratio. 

AXIS REIT Islamic compliant REIT focusing on office & industrial estates. Looking for the acquisitions of new logistics warehouses & retail warehousing in Johor plus a new venture into office building in Cyberjaya. Fresh capital will be raised from proposed placement of new units instead of further borrowings. 

AL-HADHARAH BOUSTEAD REIT First in the world to raise funds for plantation. Malaysia offers world-class palm oil companies & infrastructure and is a bee hive for the plantation sector. Plantations have a life span of 25 years before replanting, thus acquisition of new land is key (though Malaysia is running out of plantable land) to maintain future dividend yields and investor interest. With low gearing, raising finance is not a problem. I have always favoured plantation related investments. 

QUILL CAPITA TRUST Run by a joint venture between Quill, a Malaysian project developer and CapitaLand Singapore. It has 100% tenancy and occupancy of its buildings. Like CapitaMalls, it is able to leverage upon its partner who has a good track record in managing REITs. Its gearing is much better than CapitaMalls but has a free float of only 40%. I like it because it has a well balanced portfolio distribution combined with a good mix of local and foreign tenants & still allow room for more acquisitions. 

HEKTAR REIT Retail-centric REIT and has a strategic partner named Fraser Centrepoint, a Singapore-based REIT manager who is an aggressive investor. Has the highest gearing among all REITs and I see nothing outstanding in their future pipeline. 

AMANAHRAYA REIT Trust listed by Amanah Raya Berhad, a corporation wholly owned by the government of Malaysia. Well diversified throughout industrial, educational, commercial and hospitality sectors. Being Malaysia's premier trustee company they would be looking at sustaining competitive dividends for investors and avoid riskier opportunities. Just a decent & stable REIT. 

TOWER REIT Has some similarity to AmFIRST REIT, performance is mainly driven by retention of major tenants; HP and ING & to perform asset enhancement. This REIT does not offer anything spectacular except that it has low gearing. 

UOA REIT Has a status of being a pre-eminent developer & commercial landlord in Malaysia. It is extremely good at what it does best which is to put focus on modern & pleasant looking office buildings with standard designs. It has a mega project known as Bangsar South City (MSC status granted) & has plans to further develop the area depending on market sentiment. The bulk of revenue comes from sales & but they also have rental income. 

ATRIUM REIT Focused portfolio on logistics for industrial estates and its portfolio is 100% leased to multi-national corporations which I find lacking in diversification. 

AMANAH HARTA TANAH PNB Don't bother, it is the most boring. They are currently seeking RM65 million in revolving credit to upgrade and refurbish Plaza VADS, that's all really. I rather park my money in AmanahRaya REIT than this.

Now you would ask me why I pick those 5 only. It comes back to the three questions & well, everyone has their own answers. What is yours? 
  • What is my investment strategy? Income (dividend) and growth (capital gain). mREITs offer exposure to commercial assets with huge potential and a suitable time now as interest rates are low and high yields. Opportunity! 
  • Financial goals? Fixed income allocation to provide 6% to 8% returns per annum. REITs fit perfectly. My fixed income portfolio could do some diversification apart from just investing in mixed assets fund (70% bonds & 30% equity). 
  • The risk I am willing to take? REIT to have low or reasonable gearing, the call to buy when share price is at a discount to its NAV. REIT also must have or developing what I call trophy assets (Boustead is an exception here) and have a clear & focused strategy. 
Should you invest in REITs? 
Certainly Yes! (unless you are a short term investor & have appetite for higher returns). REITs are not stocks, they are traded just like stocks but they have a totally different risk profile. With REITs your income comes from rental streams where tenants are locked into long leases. This is different than owning a stock like IOI Corp where you are exposed to business risks because it is trying to run a palm oil plantation (Boustead REIT is an exception here). I'm sure everyone prefers to collect rent over operating a business. I am looking to select two REITs for my portfolio so the "Finals" we will held in Part 2 :) Until then sayonara till we meet again...

1 comment:

furnished office said...

REITs are good investment plans too.

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