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The Malaysian real estate investment trust (MREIT) market has yet to realise its true potential compared to peers around Asia, primarily due to the lack of overseas investors participating in Malaysian entities.
Hall Chadwick Asia Sdn Bhd’s chairman Kumar Tharmalingam, in a panel discussion on “Property, REITs or property stocks” at The Edge Investment Forum on Real Estate on April 10, said MREITs are off the radar screen of foreign investors because they are significantly smaller in size than REITs in countries like Japan, Singapore and Hong Kong.
In terms of market capitalisation, the MREIT fraternity was valued at US$1.58 billion as of January this year compared with Japan’s US$31.8 billion, Singapore’s US$20.5 billion and Hong Kong’s US$9.3 billion, placing MREIT in sixth place in the region.
Apart from less competitive tax structures, Malaysian property trusts are not allowed to park their money in real estate development projects. This means local REITs are not able to equity-account profits from property projects or gain cheaper entry into these properties to maximise returns.
The fact that MREITs can only borrow up to 50% of their asset value has also stifled the growth of local players compared to those in Japan, Hong Kong and Taiwan, where REIT fraternities are not subject to gearing limitations. Thus, foreign markets have been able to expand their asset base via acquisitions at a faster pace than Malaysian entities.
“It [MREIT] is primarily a Malaysian tool,” Kumar said, adding that Malaysians make up 98% of investors in MREITs as existing policies are tailored to the long-term intention of lawmakers to gradually establish these property trust funds.
However, new players here are expected to stir some interest among overseas investors. Kumar, whose company offers corporate real estate services, said the planned entry of Sunway City Bhd’s Sunway REIT with a potential asset base of up to RM4 billion would offer a new benchmark for MREITs by virtue of its attractive portfolio.
“The moment an individual REIT [in Malaysia] achieves a value of more than RM4 billion, it begins to attract foreign investment,” Kumar said.
Sunway REIT, which comprises commercial properties under the group, is one of three REITs expected to be listed in Malaysia this year. The other two are Singapore-based CapitaLand Ltd’s pure Malaysian retail REIT and Qatar REIT.
CapitaLand’s estimated RM3 billion entity comprises Sungei Wang Plaza and Mines Shopping Centre in the Klang Valley, besides Gurney Plaza in Penang. The estimated RM1 billion Qatar REIT, meanwhile, owns serviced residential units in Qatar.
A REIT is a trust fund that invests in real estate for rental income, which in turn is distributed as dividend to unit holders. Unlike unit trust products that are sold via banks or agents, REITs, like the shares of listed companies, are traded on the stock market, allowing investors to lock in capital gains via changes in the prices of the securities.
The MREIT market came under the spotlight in 2005 following similar markets in countries like Singapore, Hong Kong and Japan. Since the first REIT — Axis Real Estate Investment Trust — was listed on the local exchange in August 2005, the number of property trust funds in the country has grown to 12. These include names like Al-Hadharah Boustead REIT, AmFIRST REIT, Quill Capita Trust, YTL Corp Bhd’s Starhill REIT and UOA REIT.
For now, Starhill, with a real estate asset base of RM1.66 billion, is the largest in terms of asset value followed by AmFIRST, with RM1.02 billion worth of properties. In terms of gearing, Starhill and Al-Hadharah have the lowest ratio of 11%.
More upside in MREIT unit prices
Kumar sees the unit prices of MREITs rising, spurred by the combined effects of a firmer ringgit and rising inflation. The existing landscape has prompted the anticipation that MREIT unit prices will trade closer to their net asset value (NAV) in the next six months.
A stronger ringgit will encourage overseas investors to buy local assets such as REITs, deemed a hedge against rising inflation as Malaysia’s economy regains its strength.
“It’s very positive,” Kumar said. A company’s NAV or book value indicates the total worth of its assets, which shareholders would receive should the business be liquidated. Comparing a company’s share price to its NAV will tell whether a stock is under or overpriced.
In March this year, Malaysia’s central bank raised the overnight policy rate by 25 basis points (bps) to 2.25% after having kept the country’s benchmark interest rate at 2% at seven consecutive monetary policy committee meetings. Economists foresee a 100bps rate hike this year.
Investors usually park their money in countries with higher interest rates to generate better returns on their funds. Investors also place their money in a country deemed to have positive long-term fundamentals, but foreign funds can come in due to the potential of quick gains as well, which denotes speculative elements in the local market.
Anticipation that the ringgit will strengthen will spur overseas investors to acquire local assets such as stocks and real estate. As demand for the currency increases, its value will appreciate further.
This translates into double gain for foreign investors when they sell their assets as they will be able to reap both currency exchange gains and capital appreciation of their assets.
The ringgit was traded at 3.1873 against the US dollar on April 9, the highest level since May 9, 2008. It was traded at 3.2008 last Wednesday. Malaysia’s inflation, as measured by the Consumer Price Index, rose by an annual rate of 1.2% in February this year.
All things considered, it is safe to assume that MREITs will be closely watched by global investors for their growth potential as the Malaysian property sector regains its momentum amid a recovery in the broader landscape.
It is now up to the local policymakers to write the next chapter of the Malaysian property trust industry’s growth story.
This article appeared in City & Country, the property pullout of The Edge Malaysia, Issue 802, April 19-25, 2010
