Making the REIT investments

By Sharen Kaur
Published in NST on December 19, 2014

STRONG UPSIDE: Those with quality commercial, industrial and healthcare assets to do well

KUALA LUMPUR: It will not be all doom and gloom for Malaysian real estate investment trusts (REITs) next year, with potential upside from the injection of new assets and extensive refurbishment of existing portfolio assets in the past 12 months.

There are currently 16 REITs listed on Bursa Malaysia and the largest player is KLCC Stapled Group, which has property assets in excess of RM12 billion.

MIDF Research head Zulkifli Hamzah expected select REIT players to continue to do well, particularly those with quality properties in the commercial, industrial and healthcare space.

He is recommending REITs with strong assets, such as Sunway REIT, Al-Aqar Healthcare REIT, IGB REIT, KLCC Property Stapled REIT and Pavilion REIT.

Quill Capita REIT can also be considered as it has opened the Kampung Baru mall, which will contribute 100 per cent to its earnings next year.

Zulkifli said judging from the condition of the property market, there could be some easing in prices, given the softer market condition.

“Hence, we do not expect the REIT players to rush into buying as they would rather keep a wait-and-see stance. The gestation period for new acquisitions could be lengthy due to the purchasing process, further enhancement that might be needed, as well as ensuring the right tenant mix,” he said.

Zulkifli said depending on the capital requirement and the location of each REIT players’ existing assets, taking the enhancement route going forward might be less capital-intensive and have faster turnaround time.

On the other hand, RHB Research Institute Sdn Bhd expects Quill Capita Trust and Axis REIT to wrap up their respective asset acquisitions towards the end of this year or early next year.

It also expects Sunway REIT, CapitaMalls Malaysia Trust and Hektar REIT to start reaping the fruits of their labour as the extensive refurbishments of their malls are due to be completed by the end of next year.

On future acquisitions, RHB Research said it might be more challenging after the implementation of the six per cent Goods and Services Tax on April 1 next year.

It expected all purchases of commercial assets to be subject to the six per cent GST and, hence, could potentially cause the assets’ yields to become less attractive.

However, it expects no significant changes on the sector’s organic growth.

“We believe even if the electricity tariff were to increase again during the next review in mid-2015, the impact will be largely manageable as some REITs, such as Pavilion REIT and KLCC Stapled Group, have started raising their service charges and, hence, cushioning the impact of higher tariffs.

“At the same time, we also think that the GST is unlikely to dampen the REITs’ organic growth,” RHB Research said in its Malaysia Strategy 2015 report released this week.

It opined that retail REITs would outperform its peers, given their relatively stable average annual rental rate growth of five to seven per cent, compared with the two to three per cent growth in the industrial segment and flattish annual growth for the office segment.

Meanwhile, RHB Research thinks REITs could take a breather next year as the risk of further hike in the Overnight Policy Rate (OPR) has been reduced following the fall of crude palm oil and crude oil prices.

“As the decline in commodity prices is expected to adversely affect the economic outlook, the focus has, therefore, been switched to stimulating growth rather than containing inflation. As a result, we believe the OPR will likely remain stable next year. This should be favourable to the REITs, given the steady yield spread and also stable interest cost on borrowings,” it said.

Sunway REIT Management Sdn Bhd chief executive officer Datuk Jeffrey Ng Tiong Lip said it was a challenge for REIT players to acquire yield-accretive assets.

He said there were good assets in the market but the owners were selling at an expensive price, making the yields unattractive

“We will continue to look for assets, but more importantly, making acquisition in the current market condition is not easy as people want to sell them at a very high price. This means the yields would be lower. For REIT like us, we can’t acquire properties with low yields as it will be dividend per unit dilutive,” Ng told Property Times.

Sunway REIT Management is the manager for Sunway Real Estate Investment Trust (Sunway REIT), which has 12 assets in its portfolio.

Sunway REIT’s market capitalisation is RM4.4 billion as at December 5 and its total portfolio assets are valued at RM5.56 billion as at September 30.

Sunway REIT Management is buying Sunway Hotel Georgetown in Penang and Wisma Sunway in Shah Alam for RM134 million from its parent, Sunway Bhd, to provide stable cash distributions to unitholders.

These assets will be injected into Sunway REIT and raise its value to almost RM5.7 billion when both acquisitions are completed over the next 18 months.

Its last asset acquisition was in 2012 when it bought Putra Place in Kuala Lumpur.

The four-star hotel in Penang, which has a gross floor area of 192,383 sq ft, completed its refurbishment exercise in April last year and is said to have a market value of RM74 million as at July this year.

The hotel will be leased back to the vendor, Sunway Biz Hotel Sdn Bhd, for a 10-year term with the option to renew for another 10 years.

Wisma Sunway, a newly refurbished office building, is located within a captive office market in Shah Alam and more than 90 per cent of its tenants are government agencies.

The acquisition of the hotel and Wisma Sunway will be funded through Sunway REIT Management’s existing debt facility, which will increase its gearing ratio from 32 per cent as at September 30 to 33.5 per cent.

On the outlook for next year, Ng said the performance for Malaysian REITs in general was expected to be flattish.

“There is no question that the market is looking quite volatile. We are now seeing fluctuations of the ringgit and that may have an impact on interest rates. There is also government subsidy rationalisation. The Goods and Services Tax (GST) is coming up, too. There are also a lot of external factors we are going to face next year. All these will definitely affect consumer sentiments or business confidence. So it is definitely going to be a very volatile year.”

He also said the market for commercial assets such as retail malls, offices and hotels was in a soft competitive situation by virtue of the number of new properties of the various asset classes that are coming into the market.

“There are more hotels, malls and offices... it is very apparent that the supply is there and, therefore, the situation will continue to be very competitive,” Ng said.

Sunway REIT was listed on the Main Market of Bursa Malaysia on July 8 2010 and, with a RM5.7 billion portfolio, is the country’s second-largest REIT in terms of assets size as at December 5, behind KLCC Stapled Group.