SINCE the listing of the first real estate investment trust (REIT), Axis REIT, in August 2005, Malaysian REITs have grown steadily. An increasing number of REITs of different asset classes are being listed on Bursa Malaysia each year.
Foreign institutional investors who have not seriously considered Malaysia as a preferred investment destination for REITs are now taking a second look at this option.
The sudden attraction may stem from Malaysia's robust economy and a strong interest in properties from local and foreign buyers, with several en bloc sales of residential and commercial properties over the past two years.
Greater foreign interest in Malaysian REITs is buoyed by the strong infrastructure development occurring in major cities across the country, especially in the Klang Valley and the Iskandar Development Region in Johor.
Their interest would be further stoked by the acceleration of the Ninth Malaysia Plan projects across the nation. Foreign institutional investors also view Malaysian REITs as undervalued.
Kurnia Insurans Bhd chief investment officer Pankaj Kumar, who manages funds of about US$460mil, said foreign institutions were generally keener than locals to invest in Malaysian REITs, despite its infancy and the asset size of local REITS.
Pankaj Kumar
“Malaysian REITs may be small compared with REITs in mature economies that are worth billions, but foreign investors are still willing to invest. One of the reasons is that they are more familiar and knowledgeable about REITs,” he told StarBiz.
A local broker said Malaysian investors were generally not interested in REITs because they had a short-term investment strategy.
“The REIT industry is defensive by nature and the stocks under trusts generally rise slowly in value over time. If managed well, they provide steady returns,” he said.
He added that REITs were never tailored to aggressive investors or high-risk takers.
The broker said many of the pension funds from developed economies were parked in REITs, with investors taking a medium to long-term view to investment.
Stewart LaBrooy
“These investors are not out to sell their shares (when the prices are high) but rather to get regular and steady investment returns by way of capital gain or dividend,” he noted.
Pankaj said foreign institutional investors generally had a better understanding of REITs, especially the difference asset classes and their potential investment returns.
“While the REIT industry is still in its infancy in Malaysia, foreign investors can see the potential for growth of local REITs over time,” he said.
He added that Kurnia invested in various classes of REITs.
Pankaj sees other issues about Malaysian REITs that need to be highlighted.
“While foreign investors are gaining greater interest in Malaysian REITs, they feel that the local REIT industry could develop faster if more incentives were given.
“While there were some liberalisation of foreign ownership rules in the property sector, the last Budget did not provide much for Malaysian REITs,” he said.
Chan Say Yeong
Another issue was the lack of detailed coverage by analysts on Malaysian REITs, Pankaj added.
A Singapore-based fund manager concurs about the lack of incentives.
She said the tax regime for Malaysian REITs should be more investor-friendly to attract more local and foreign investors into the industry.
“Currently, individuals pay a flat 15% tax while foreign investors pay 20%, which is higher than in Hong Kong and Singapore (where the withholding tax for foreign investors is 10%),” said the fund manager.
She said basically the problem with Malaysian REITs was that they were too small (in asset size) to attract foreign funds.
“One way to fast-track the growth of the asset size is to allow REITs to be invested in development projects, subject to a cap in their fund size.
“Another incentive is to increase the statutory gearing limit to about 60% (currently 50%) of the REIT's asset size and shorten the property transaction period.
“Such incentives would expand the breadth and depth of assets that can be invested in REITs. Moreover, it will also benefit the property sector as there will be more room for developers to partner with REITs to develop and sell their projects,” she said.
The fund manager said it would be difficult for local REITs to grow their asset size quickly unless they had a ready pipeline of properties to be injected.
In the case of Axis REIT, the REIT's managers had a portfolio of properties that were ready to be injected into the REIT.
Axis REIT chief operating officer and executive director Stewart LaBrooy said: “We have been very aggressive in acquiring properties over the past 2½ years before injecting them into the REIT. We hope to grow the property trust to RM1bil by end-2008.”
Another local REIT that has a steady pipeline of properties is Quill Capita Trust, which is managed by Quill Capita Management Sdn Bhd (QCM).
QCM chief executive officer Chan Say Yeong said Malaysian REITs offered better yields compared with those in mature Asian economies such as Hong Kong and Singapore.
“The yields for Malaysian REITs generally range from 5.5% to 7% while those in Singapore range from 2% to 3%, which makes local REITs very competitive,” he said.
Chan said QCT was 50%-owned by foreign institutional investors.
“Foreign investors view Malaysian REITs as very affordable with good yield potential,” he said.
A foreign fund manager said REITs were defensive stocks that were suited for investors who were adverse to high risk.
He advised Malaysian investors to have a diversified investment portfolio that included REITs, which provide stable dividends and capital gains over the medium to long term.
“Malaysian REITs offer an attractive proposition because of their good yields and lower valuations,” he said.
The foreign fund manager said that with Thailand and Vietnam' commercial properties not as ready or as attractive to be injected into trusts and Singapore and Hong Kong's REIT markets being fairly mature, Malaysian commercial properties offered an attractive value proposition.
By The Star (by Danny Yap and Fintan Ng)
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