Thursday, April 2, 2009

Malaysia REITs - The Sunrise Industry

It’s high yielding, way cheaper than valuation and thrives in a low interest rate environment.

The humble REIT (or Real Estate Investment Trust) has come a long way in Malaysia over the last four years.

Since the listing of Axis REIT in August 2005, the market cap of Bursa Malaysia REITs has reached RM4.1 billion as of last Friday 20-Mar-09.

Interestingly the first listed REIT in Malaysia was not Axis REIT as is commonly believed. It was actually Arab-Malaysian Property Trust which was listed as far back as 1989. Through a series of corporate exercises it eventually became AmFIRST REIT and re-listed on 21 December 2006.

So far REITs on Bursa Malaysia have experienced a lukewarm response from investors. And 2009 is proving to be a year of consolidation for the sector.

A couple of REITs got off to a good start but since then the unit prices of all REITs have fallen way below Net Asset Value.

REIT Price
20/3/09 Net Asset
Value Discount
to NTA
Alaqar KPJ 0.89 1.03 14%
AmFIRST 0.84 1.03 18%
Amanah Raya REIT 0.705 1.02 31%
Atrium 0.62 1.04 40%
Axis REIT 1.28 1.75 27%
BSD Reit 1.03 1.49 31%
Hektar 0.92 1.26 27%
Qcapita 0.81 1.21 33%
Starhill REIT 0.73 0.97 25%
Tower REIT 0.875 1.59 45%
UOA REIT 0.98 1.39 29%


Huge Potential
While our REITs have come a long way, there is still so much room for growth.

The market cap of the entire REIT sector on Bursa is not even half the market cap of CapitaMall Trust in Singapore. The RM4.1 billion market cap we have is not even 1% of our overall stock market.

It will grow… it’s just a matter of time. And institutional money will eventually pour in.

If you are looking for a career, think of becoming a property funds and asset management professional. Just kidding, do something you actually love to do… if it is REIT management then fantastic

Far from Mature
So the REIT market on Bursa Malaysia is small, has low investor participation and low trading volume. My guess is that it will take a good 15 years at least to become “mature”. This is a classic situation for mispricing due to a lack of depth and understanding. Right now we have low interest rates and high yields which is a great opportunity for investors.

Trophy Assets
Ideally the best real estate assets in the country should be placed in REITs. It would really help create an awareness of REITs. Petronas Twin Towers, Mid Valley Mega Mall, 1Utama and the likes of these… many investors would want to own a piece of these properties.

OK granted that you can own a piece of Petronas Twin Towers and Mid Valley by buying shares in KLCCP and Kris Assets but it’s not the same. Both companies pay out less than 50% of earnings in dividends and are not tax efficient as compared to holding the assets in a REIT structure.

REITs are not Stocks
Somehow I get the feeling that most investors in Malaysia don’t dig this. In reality REITs have different risk profiles. When you buy shares in say Sime Darby, you are exposed to business risks. When you invest in say TowerREIT, your income is from rental streams. It doesn’t take W Buffett to figure out that collecting rent is so much easier and safer than running a palm oil plantation, especially when you have blue chip tenants locked into long leases. There are some exceptions, for example REITs like Starhill REIT and Boustead REIT which have an element of business risk in them.

Should I Invest in REITs?
Absolutely Yes! (but not if you are a short term player). Based on current prices, they add a good yield to your portfolio. For now, collecting rent is to be preferred over operating a business

Analysis of REITs
Don’t just look at the headline yield! I will cover this in another article soon.

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