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Tuesday, July 22, 2008

REITs an alternative to other stocks

PETALING JAYA: As large numbers of investors exit from stocks and shares of companies, high yielding real estate investment trusts (REITs) are a viable alternative.

Although REITs are equities in the sense that they are also entities listed on Bursa Malaysia, “downside is limited for these assets,” said an investment officer at Meridian Asset Management Sdn Bhd.

There are very few alternative asset classes in this country in which savers would be willing to place a large part of their savings. Generally, for the average saver, the few choices are shares, property or cash.

The edge that REITs have over real property is that in the former, investors would be buying them below their net asset values (NAV) whereas buyers would have to pay market prices for real property.

The NAV of Quill Capita Trust, for instance, was reported as RM1.20 per unit earlier this month. The REIT closed at RM1 yesterday.

In addition to this discount to its NAV, Quill Capital offers a yield of about 8.5% after its price has almost halved from a high of RM1.90 last year.

While there were concerns that property prices could decline as economic growth slows in the second half of the year, the discount in Quill Capita's NAV was defensive while replacement cost for its properties had increased, the Meridian officer said.

As a result of the much higher costs of cement, steel and other building materials, the construction cost of commercial properties has sharply increased. Quill Capita owns a range of commercial properties that comprise office, retail and technology park buildings.

The current barriers to growth would be, ironically, its high yield of 8.5%, which means it's difficult to identify and purchase properties that have a higher yield than the REIT. It would be difficult to find properties that are yield accretive for the trust.

High interest rates would also erode its ability to expand with borrowed funds.

It is partly for this reason that REITs in Singapore have also fallen in price where they are yielding about 7% against a lower benchmark yield in government securities.

Expansion by REITs may have to wait until their prices move back up.

“It would have to be money that can be kept in a REIT for a two-year time frame,” the officer said, adding that during that time, the investor would receive a good yield.

By The Star

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