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Monday, July 21, 2008

Lack of incentives hindering REIT growth

KUALA LUMPUR: Although most real estate investment trust (REIT) valuations are relatively cheap now, declining well below their current net asset value (NAV) per unit in tandem with the recent decline of the market, investors are still reluctant to invest in them due to the unattractive tax structure and incentives, analysts said.

Analysts said the lack of investor confidence in the REITS had to do more with the issue of withholding tax and lack of other incentives rather than the unattractive yields or asset quality.

At the moment, Malaysia has one of the most unfavourable tax regimes for REIT investment. A witholding tax of 28% is imposed on foreign investors, while individual distributions received by investors are taxed as high as 26%.

In comparison, Singapore’s REIT investors are exempted from withholding tax but foreign institutional investors and corporations are subjected to a 10% withholding tax. In Hong Kong, the withholding tax system no longer exists.

Based on selective counters, at the close of trading last Friday, Starhill REIT ended at 87 sen per unit (NAV: 97.2 sen), UOA at RM1.13 (NAV: RM1.39), Tower REIT at RM1.09 (NAV: RM1.45), Axis at RM1.64 (NAV: RM1.65), Quill Capita at RM1.04 (NAV: RM1.20) and Atrium REIT at 76 sen (NAV: 99 sen).

Atrium, StarHill and UOA are trading below their IPO prices. The annual yield of the six REITs averages 9.41%, representing a favourable and good return on investment (ROI), particularly amid the high inflation and slowing growth environment.

“Given the lack of new incentives and new regulations to spur the industry, we are unlikely to see any major upward movement in the unit prices of the REITs and their values will continue to be depressed in tandem with the current market condition,” an analyst said.

While REITs offered one of the highest ROI, analysts said it was not enough to lure investors to invest in small capitalised stocks.

“While the returns are basically good, if compared to the returns from the market, the current structure governing REIT investment has hardly changed since its inception in 2005 as the successor to the old property trust.

“The incentives, tax structure and rules have to be revised, hopefully in the coming budget, in order for the REIT industry in Malaysia to flourish,” an analyst said.

In terms of asset quality, the top picks among analysts are UOA REIT and Starhill REIT, while Axis REIT is the favourite in terms of management quality, as it has been one of the most aggressive in terms of acquisitions and property portfolio diversification.

UOA REIT, with properties predominantly consisting of offices and commercial buildings, provides a good benchmark in the recovery and demand of office space, especially in and around the Kuala Lumpur’s central business district (CBD).

Starhill REIT had on July 11 announced a revenue of RM108.23 million for the year ended June 30, 2008 (FYE08), an increase of 9.5% over RM98.84 million in FY07, while net income was up 11.8% to RM81.27 million from RM72.69 million.

Mayban Trustees Bhd, the trustee of Starhill REIT, undertook a revaluation exercise on Lot 10, Starhill Gallery and JW Marriot Hotel that would increase the valuation of the company’s prime properties by RM254.36 million. As at June 30, 2008, Starhill Gallery and Lot 10 had occupancy rates of 99% and 94%, respectively.

The analysts said the current depressed REIT prices did not reflect their relatively strong fundementals as an inflation-beating investment that could provide a consistent dividend stream due to the strong asset quality.

But for the sector to see some excitement among investors, there is no denying the fact that the local REIT industry needs a boost in having better incentives that are at least on par with regional peers.

By The EDGE Malaysia (by Tony C H Goh)

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