Multiple challenges facing REITs

Like many other asset classes, Malaysia’s real estate investment trusts (REITs) have been sold down and are trading below their net asset values (NAV), made worse by the softening property market and weakening rent yields.

The challenges facing REITs is not only the negative market sentiment towards equity, but also the inability to raise capital due to tightening credit.

Despite the challenging economic conditions this year, REIT managers in the country are confident they can mitigate the impact by looking at various options to raise capital, acquiring properties prudently and focusing on existing assets to ensure strong tenancy.


Stewart LaBrooy

Axis REIT Managers Bhd chief executive officer and executive director Stewart LaBrooy said part of the growth process of a REIT was to continuously acquire properties to enlarge its portfolio.

He said Axis REIT would not discount the possibility of future acquisitions this year although it may not be as intensive as 2008.

“But any potential acquisitions will need to be yield-accretive,” he told StarBiz.

With the reclassification of Axis REIT as syariah-compliant last December, the REIT hoped to appeal to a broader investment base of both conventional and syariah funds locally and abroad to facilitate Axis REIT’s future capital raising exercises, he added.

Currently, Axis REIT’s focus is on local properties as LaBrooy believes there are still many “reitable” assets in Malaysia.

He said many companies were exploring strategies such as sale and leaseback, which would help release cash back into the business and operations.

“In addition, we are proactively engaging with property developers or contractors to produce more reitable assets,” he added.

Axis REIT, which owns 19 properties, has put on hold its acquisition plans until further capital can be raised. LaBrooy said the company had always tried to maintain a policy to cap its gearing level at 40%.

He said its gearing level was at about 34% now, which means it can still borrow RM260mil.

Axis REIT is also proceeding with refurbishment activities at three of its properties - Menara Axis, Nestle House and Crystal Plaza - which will cost about RM8mil.

The refurbishment is aimed at attracting tenants and potential clients, and sustain asset valuations.

Atrium REIT Managers Sdn Bhd chief executive officer Paul Lim said the earnings outlook for REITs for the first half year of 2009 was expected to be stable.

“But beyond that I am holding (off) optimism (until) 2010.

“The outlook is still unclear as the actual impact of the global financial meltdown is not yet felt, particularly on the rental squeeze (as) tenancies are still intact. Lower borrowing costs now may boost earnings a bit more. At the entry price today, our net earning per unit yield is in excess of 11%.

“I think it’s attractive compared with fixed deposit rates, which (are affected) by the reduction in the overnight policy rate by 75 basis points to 2.5%,” he said.

Currently, Atrium REIT is looking at logistics-based industrial assets.

Although it was in preliminary discussion with a few potential landlords, it had no plans yet for new acquisitions so far, said Lim.

For Hektar Asset Management Sdn Bhd, the manager of Hektar REIT, most of its income comes from leases to retailers.

Its retail mall properties have achieved relatively stable income, with only 26% of Hektar REIT’s monthly income tenancies expiring in 2009, while the rest of the rental income is already locked for longer term.


Datuk Jaafar Abdul Hamid

Hektar chairman and chief executive officer Datuk Jaafar Abdul Hamid said it would continue to focus on retail assets and grow its asset base via acquisitions.

He foresaw huge opportunities in shopping centres throughout Malaysia as Hektar REIT only owned 1.1 million sq ft of shopping centre space now, compared with a total of close to 90 million sq ft of shopping centre net lettable area (space for rent) in Malaysia.

Jaafar said Hektar REIT would develop new properties on a private basis through the group’s private company which is focused on developing retail assets as REITs are not allowed to develop new properties.

“We aim to develop and own world class retail shopping centres serving the needs of ordinary Malaysians,” he said.

Meanwhile, GLM REIT Management Sdn Bhd, the manager of Tower REIT, said it would continue to inject good quality and yield-accretive prime office assets in the Klang Valley into the REIT, but with greater caution and discernment.

“Our growth strategy emphasises on value and focuses on prime office buildings while maintaining uncompromising criteria for new acquisitions,” says GLM REIT chief executive officer Chan Wan Leong.

Tower REIT would continue to adopt optimal gearing levels and will actively manage the risks associated with changes in interest rates and capital markets, he said.

Chan believed that the REIT sector was still at a relatively early stage of development as there were not many players and the challenge was how to attract more REIT players and investors into the market.

“This in turn will improve liquidity and add vibrancy in the industry,” he said.

While there are challenges, Tower REIT is confident the market will improve eventually, especially with the Government’s support through its stimulus packages and fiscal policies.

By The Star (by Rachael Kam)