Published in Asia Asset Management July 2007
Government policies have given Malaysian real estate investment trusts (M REITs) a boost but the country’s fledgling RM4.54 billion REIT industry, now just barely two years old, needs more help to grow.
Top on the wish list of REIT managers in Malaysia is a further decrease in the tax rates on REIT incomes to bring them in line with those charged by neighbouring Singapore, which has done away with taxes on REIT payouts to individuals and reduced those on REIT dividends earned by foreign companies to 20%. While Malaysia too, has brought its REIT tax rates down, apparently it is not enough.
Last September in his budget speech, Prime Minister Abdullah Badawi acknowledged REITs as a product that will help further diversify Malaysia’s capital market and attract both local and foreign investors.
He announced that until 2012, dividends from listed REITs received by local and foreign individual investors and local unit trust companies will be taxed at 15%. In the case of foreign institutional investors, the withholding tax would be 20%. In addition, if a REIT distributes at least 90% of its income, then its undistributed income is tax exempt.
“People were expecting more this budget,” commented Tan Beng Ling, CIO at Meridian Asset Management, one of the fund managers for MAAKL Mutual’s recently launched REIT fund, the MAAKL Asia-Pacific REIT Fund (MAPREIT). MAPREIT is a fund-of-funds that would focus not only on real estate but also infrastructure REITs in the Asia-Pacific region.
“This is a distinct area for improvement,” she emphasised. “Last year, all of us were expecting the tax rates to equal those of Singapore.”
“Currently we are not competitive vis-à-vis Singapore. As a result, we get compared all the time,” said Stewart LaBrooy, executive director of Axis REIT Managers. The Securities Commission, he added, had been proactive in “fighting” for the industry.
“They are trying to make a case for the tax structure with the Ministry of Finance. There is a tax holiday for bonds but REITs are treated like corporate stocks,” he explained. A 0% tax on individual REIT income could be a magnet for the mom and pop investors and encourage small players, like pensioners, to enter the market.
The country currently has 11 REITs listed on Bursa Malaysia, which together are a diverse lot with a wide asset portfolio. There is a plantation REIT (Al-Hadharah Boustead), a hospital REIT (Al-‘Aqar KPJ), office REITs (Tower, AmFirst, UOA, QuillCapita), a shopping mall REIT (Hektar), industrial REITs (Axis, Atrium), a hotel and shopping mall REIT (Starhill) and the mixed bag Amanahraya REIT, which owns offices, colleges, a factory and hotels.
Not all, however, are doing well. Since the first REIT, Axis REIT, was launched in Malaysia in August 2005, the industry has generally met with a lukewarm response. “Interest in the REIT market is still very selective. Some REITs have done well, some not so well,” observed Ms Tan.
“The REIT market is underperforming the general market and Malaysian REITs are underperforming regional REITs,” she continued. “REIT is a relatively new instrument in Malaysia and there is not a lot of awareness and investor education.”
Highest Yields in Region
Malaysian REITs provides one of the highest yields in the region, with earnings at an average of 7.5%, 400 basis points above the country’s 10-year government bond rate of 3.5%, yet their share prices are not performing, Mr LaBrooy pointed out.
One of the reasons was the poor performance in acquisitions and growth of the REITs, he said. Furthermore, fund sizes are small, which means no liquidity and therefore little interest from foreign fund managers. Next to Singapore’s US$17.3 billion REIT market and Hong Kong’s US$6.5 billion one, Malaysia’s REIT funds are miniscule at US$1.2 billion.
Valuations have also been near their peak at the time of listing with high gearing, giving the manager little head room to buy new properties, Mr LaBrooy added. Gearing levels for M REITs have been increased to 50% of gross asset value.
M REITs have also been dogged by the negative perception that the majority of REITs here were listed as an exit for companies wanting to cash in and extract the highest value for their properties. In addition, there was a perception that the managers have little or no experience in the management of a trust.
Foreign interest in M REITs only started being evident about two to three months ago, after the government relaxed regulations governing foreign ownership of property in Malaysia. For example, Frasers Centrepoint Ltd, the sponsors of Singapore-listed REIT, Frasers Centrepoint Trust, last month bought a 27% stake in Hektar REIT.
Malaysian properties are currently seen as oases of opportunity. “It is the cheapest in Asia. There are a lot of people in Kuala Lumpur with suitcases of money waiting to buy,” remarked Mr LaBrooy. “With the new regulations, all the high-end condos in KL were sold out in a few months.”
M REITs should benefit from the spillover of foreign interest in Malaysian property. Axis REIT, for example, has been receiving a high level of interest from foreign fund managers regarding its planned placement of another 50 million units by this year-end
REITs, according to Mr LaBrooy, is all about property management, and the way to grow a REIT is through acquisition and enhancement of existing properties. For example, when Axis REIT took Kompleks Kemajuan, a tired commercial building in Petaling Jaya, and renovated it to a high standard, it got higher paying tenants which pushed up the property value and increased capital gain.
QuillCapita Trust, CapitaLand’s fifth REIT and the first to be listed outside Singapore, last month bought two properties, Wisma Technip and Plaza Mont Kiara, both commercial buildings in Kuala Lumpur, adding these to its four office buildings in Cyberjaya.
More REITs are in the pipeline. Sunway City is planning this year to float the largest REIT on offer at an expected market capitalisation of RM2 billion, exceeding YTL Corp’s RM1.2 billion Starhill REIT, listed in December 2005. Sunway’s REIT is expected to include its Sunway Pyramid shopping mall, the Monash University Campus, the Sunway Lagoon Resort Hotel and Menara Sunway office block.
Sime Darby have also announced plans to study the possibility of putting their property portfolio into an office/industrial REIT with market capitalisation in the region of RM1 billion, while PNB, too, plans to place their portfolio into a private REIT this year with a market cap of RM1.5 billion.
“The REIT market is new so there are a lot of opportunities in terms of the types of REITs that can be launched, for example plantation REITs and infrastructure REITs,” said Ms Tan.
“However these need to be executed well and they need to be competitive. Why would I want to buy into Malaysia versus Indonesia, Singapore and the rest of the region,” she asked. “The long term prospects are favourable.”