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Thursday, July 1, 2010

Spotlight on REITs

The impending high profile initial pubic offering (IPO) for Sunway Real Estate Investment Trust (REIT) on the Main Board of the Bursa Malaysia has certainly raised investor awareness on this particular class of investment securities.

Sunway REIT will make its debut on July 8. Hot on its heels, yet another REIT, the CapitaMalls Malaysia Trust is slated for listing on July 16.

Although REITs have been around for some time — Axis REIT was the first REIT to be listed in Malaysia back in August 2005 — investor interest has been largely subdued with relatively thin trading volumes observed for most of the 12 REITs currently listed on the local bourse.

However, we could see increased interest going forward. For starters, the listing of Sunway REIT has helped raise the profile for this entire asset class. It will be the largest REIT on Bursa Malaysia with assets valued at almost RM3.73 billion and a market capitalisation of roughly RM2.7 billion (assuming the indicative unit price of RM0.97). Elsewhere, CapitaMalls will list with assets totalling RM2.19 billion and a market capitalisation of about RM1.46 billion (assuming a price of RM1.08). By comparison, Starhill REIT, currently the largest listed, has assets of about RM1.64 billion and market capitalisation of little over RM1 billion.

We expect the larger size and better liquidity will broaden the appeal of REITs to a wider spectrum of investors, including foreigners. Case in point, one of the four cornerstone investors in Sunway REIT is the Government of Singapore Investment Corp.

Several of the other REITs have also announced plans to increase their assets base. For example, AL-AQAR KPJ REIT recently completed the acquisition of additional assets that lifted the total value of its investment properties above the RM1 billion mark. It has further proposed additional purchases, including two hospital buildings in Indonesia, worth some RM303 million. Axis REIT too has announced acquisitions that will boost assets under management to some RM1.1 billion by end-2010.

So, what is a REIT?
Although listed and traded on Bursa Malaysia, REITs are not equity. As the name suggests, a REIT is a form of trust that invests, primarily, in property assets. Funds, to acquire property assets, can be raised through the sale of units in the trust and/or borrowings.

REIT unit holders have a direct and proportionate ownership in the underlying properties. As such, buying into a REIT is akin to property investing, albeit on a smaller scale, but which requires minimal time and effort. The properties are professionally managed.

Part of a diversified portfolio
Indeed, investors may consider REITs as an alternative investment to properties — to form part of their diversified portfolio, which would typically also include bonds and equities.

The unit price of a REIT normally tracks closely the value of its underlying assets less borrowings (NAV or net asset value). Thus REITs, like property investing, are a hedge against future inflation.

Since REITs are listed and traded on the local bourse, they have the advantage of better liquidity as compared to owning properties. Plus, investors need only a small capital outlay in order to gain exposure to a diversified portfolio of real estate investment.

Attractive yields on high distribution rate
REITs are exempted from paying corporate tax provided they distribute in excess of 90% of their annual incomes, primarily rental, to unit holders. Hence, most are committed to a high distribution rate. For example, both Sunway REIT and CapitaMalls intend to distribute 100% of incomes in the first two years of operations and at least 90% thereafter.

The high distribution rate usually translates into yields that are more attractive than that from the average equity investment. Gross yields from REITs listed on the local bourse range from 7.2% to as high as 8.4%, based on 2009's distribution rates at prevailing prices.

Currently, incomes distributed to both individual and institutional investors in 2010-2011 are subject to a final 10% withholding tax. The government has yet to indicate the tax rate beyond this period. But industry watchers expect the rate will not stray too far from the global norm, especially if the government aims to attract foreign investors. Singapore, which has one of the largest REIT markets in the region, do not levy any taxes on income distribution to individual investors.

More defensive than equity investment
REITs are widely seen as a defensive investment alternative and are appealing to investors with a lesser appetite for risks.

To be sure, unit prices are still influenced by sentiment prevailing in the equity market. However, their volatility is generally lower since the rental incomes have been, by and large, steadier than revenue for many businesses in the economy.

Indeed, the majority of REITs have registered positive earnings growth over the past few years, albeit at a gradual pace. Rental rates have, on average, been trending higher as had property values. Of course, the longer-term rental prospects and market values for individual REITs will depend heavily on the quality of their underlying property assets.

Note: This report is brought to you by Asia Analytica Sdn Bhd, a licensed investment adviser. Please exercise your own judgment or seek professional advice for your specific investment needs. We are not responsible for your investment decisions. Our shareholders, directors and employees may have positions in any of the stocks mentioned.

By The EDGE Malaysia (Written by InsiderAsia)

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