This one different from the new hospitality STAREIT ?

REIT players hope for better year

fter two quiet years in the local real estate investment trust (REIT) market, industry players are hoping for a better year in 2010 through more active retail interest, asset expansion plans, and entry of new players.

ccording to Malaysian REIT Managers Association (MRMA) protem committee chairman Stewart LaBrooy, news of some existing REITs’ plans to grow their portfolios after a two -year hiatus is encouraging.

uite a number of REITs have plans to expand their asset portfolio, with expansion by UOA REIT, AmanahRaya REIT and Al-Aqar REIT to involve new investments of RM1bil.

e said REITs would have better upside yields accretion potential if they had steady portfolio expansion through regular strategic asset acquisitions.

n whether raising enough funding for their asset expansion plans still posed a challenge to REITs, LaBrooy said: “Since the global financial crisis, there has been a game change on the regulatory environment that is helping REITs and capital markets cope with issues like faster capital raising and more self regulation.”

lthough under existing Securities Commission (SC) rules REITs can place out new units of only up to 20% of their unit base and it can be done only once every 12 months, the SC is prepared to grant specific approval to REITs to raise additional capital within 12 months on a case to case basis,” he told StarBiz.

t is possible that with the upcoming capital raising plans and new listings, there is potential for the market size to be increased to RM18bil from the current RM8bil.

aBrooy said if the listing of a few more sizeable REITs took place by this year-end, it would further add to the depth and liquidity of the market.

he upcoming REITs include the Sunway REIT which is estimated to have asset value of around RM4bil and Malaysia’s first cross-border REIT, the RM1bil Qatar REIT.

he coming onstream of these new players will inject a lot of liquidity into the market. This will create more excitement in the REIT sector in terms of size and asset class diversification and should place REITs on the radar of more local retail investors and larger foreign funds,” added LaBrooy, who is also Axis REIT Managers Bhd chief executive officer.

urrently, retail investors only account for 10% to 15% of the total REITs’ market capitalisation of close to RM6bil. The biggest portion comes from institutional investors who account for close to 60% and REITs promoters at 25%,

o promote greater trading interest and volume for REITs, the target is to raise the retail portion to 40% of the market capitalisation.

ith the huge liquidity in the local system now, there is huge potential to expand the retail interest for REITs,” LaBrooy said.

e added that retail investors were generally ill informed of the benefits of investing in REITs. “Investor education is essential and as a result the MRMA, has undertaken to conduct an investor outreach programme. So far we have conducted public roadshows in Penang, Ipoh, Klang Valley and Malacca. Our next roadshow will be held in Kuching on May 8.”

aBrooy said to make REITs more popular with the retail investor, there was a need for more liberalisation on the regulatory front and the removal of the withholding tax for individuals.

urrently, both local and foreign retail investors have to pay 10% witholding tax to the Government.

e said the recently established MRMA, with nine out of the 11 REIT managers as members, would engage the regulators to overhaul the prevailing regulations and speak as an industry body on tax issues affecting REITs in time for the 2011 budget.

n challenges ahead, LaBrooy said: “The biggest challenge for local REITs is to reach a size of US$500mil and grow beyond this. This is the minimum requirement if we are to attract foreign funds to our market and has to be an aggressive strategy for each manager.

o achieve this, the REITs have to have four conditions in place – stock price that trades at a premium to net asset value (NAV), so that capital can be raised in a non- dilutive manner; an identifiable pipeline of new assets to acquire; market yield that is achievable at the time of acquisition; and a recovery in the bond market so that new sources of financing can be obtained without reliance on bank lending,” he pointed out

I would like to point out in fact there isn't enough information for investor to participate in REITs. The aforemention MRMA isn't online, and info can't pass through internet, which is one of the most common way to distribute information. That is problem 1.

Problem 2 is the policies and guidelines changes too often and not consistent. REITs suppose to be mandated to distribute 90% of their income, but I think there is no guidelines for this and debt ratio limits difer from one to another, and the same happen in NAV calculations, where unrealised gain recurring in some and not recurring in some, aren't asset should be revalue once every year according to guideline ?

Third, it should be noted most (expect three) REITs are trading below their IPO or NAV. I believe the very reason for this is ex-date reference price have been adjusted to dividend paid. Stareit IPO price have been above RM1 , but dipped till 80 sen level after paying dividend for years, sum up those dividends we get the difference between IPO price and current unit price.

Forth, the illiquid forms that took tolls on REITs, assets can't be sold and divided, neither there is cash to buy anymore asset. REITs turn into cash cow , where investor get milked. When the cow is fat enough, just butcher it. This is what happen to Amanah Harta 2, which resolution has been passed to disband the fund by unsatisfied unit holder. Instead of getting 2 sen dividend years afters years , they will realised the gains of property sold. REITs neither growth nor liquid.

Fifth, while there is discount for NAV , REITs are trading above PE ratio of 10, while paying 90% of their income. That indicated a very disappointed return for assets which they manage. For every RM1 of asset, they earn 10sen and pay 9 sen. How can we pay above RM1 while expecting 10% of return ? It isn't growing, it isn't cheap and it isn't paying much.

2) yes, there is guideline, debt ratio cannot more than 50% of their NAV. Asset is required to be revalued every 3 years.

3) This is not much an issue for long term investors, as if properties value still intact, the value of Stareit based on NAV is still more than Rm1.00. As share price is a reaction to the yield issue which there is little or no income increment as compared to other reit.

4) Asset can be sold if the property manager wish to, just like Stareit.
Reit currently under 90% distriubtion policy only can grow through private placement to raise money which needed for new asset acquisition. AHP2 is a disappointed incident.
It all depended on how well property manager manage the property and particular property issue, like location, rental demand for the particular type of property.

5) Reit is about how much yield investors willing to pay for or willing to have.
Every year you are getting 9% yield while property is still yours. It is not like you are paying Rm1.00 to them and not returning back, The Rm1.00 property is still belonged to yours.

In fact in reality, you buy a property (residential) adn rent out, it is almost near impossible to have yield more than net 8%. Someore the property you bought is more illiquid than reit. Which reit you can sell whenever you wish to, and with any amount.

At 9%, it is miles better than money parked in FD.

10% return rate is considered moderate high or ok for investment class, giving that reit risk exposure is lesser than ordinary businesses.

Yes, reit growing is little as they can only grow, if there is rental increment, or newer acquisition to improve yield while acquisition financing is only through either borrowing or private placement.
As 90% distribution policy means that only 10% of income is retained in the company.

This post has been edited by cherroy: Apr 9 2010, 01:33 PM

This sounds very unreasonable to me. How much return would you think is sufficient to compensate for the lack of capital appreciation?

That is the big problem,on comparison, most REITs have RM1 of asset but only return 5 sen and distribute 4 sen. What I said is only the medicore ones, but there is much worse out there. What I really mean is that Earning per Unit aren't matching the NAV. Thereby affecting the yield and share price.

I think it's the best to have 10% earning compare to NAV, 100% NAV to Share price, 100% distribute income and 10% yield. But for Malaysia REITs, it most REITs only archived half, reflecting 70~80% NAV and 7~8% of yield, therefore 50~60% of earning.

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Added on April 9, 2010, 7:01 pm2,They changed the guideline again? Last time I look into the guidelines it said 40% and asset are revalued every year once. Doesn't matter, as most REITs have their own rules, such as revalue or syariah. Then there is MER, too very for me to understands as it reads " difer from one to anothers".

3, That one of the reason AHP2 disband, it doesn't reflect NAV. Share price drop and drop, volume isn't there, it is not liquid. In the long term, I guess it will be zero, huh?

4, Asset can be sold, but not less than 90% of six month their value. Consider this carefully, when buyers bought these asset , their maximum gain will only be 10% on market value. That is not very attractive, and REITs asset are huge numbers, meaning that they can't find buyers easily. Stareit sold their asset to relate REITs and reposition into hospitality REIT, that something different.

Fifth I already reply.

This post has been edited by wwloon32: Apr 9 2010, 07:01 PM

I don't think this is the case for most reit here. Generally there is around 7-8% out there. A lot of their NAV has been going up due to revaluation as we know properties price in general has gone up recent few year. But if taking into the origin NAV in consideration, they are achieving around 8% in average.

10% yield is asking a bit too much out there (but if one has bought last year, most are carrying more than 10% yield), you need to considered there is 1% charge on the management fee side of story. To have a property that can achieve gross 11-12% yield, which is not a reasonable target.

2) The guideline never change. Revaluation is every 3 years. There is SC guideline, not the like every reit has their own rules. It has been there since the reit industry kick off if not mistaken.
Syariah and revaluation is 2 totally different matter. Doesn't relate.

3) AHP2 didn't fetch any income (I don't know what is the reason, as I don't follow the issue), but as far as I had known, shareholders had formed some group to sell off the asset owned which in return will get back money through the asset disposal. They still own the property, not zero. Whatever left is the property.
When a company didn't generate any income, for sure, share price will drop and drop. Who want to invest in a share that doesn't make any money for you.

Share not liquid has nothing to do with reit or any listed company fundamental. Again it is 2 different matter, it is the fundamental issue that causing the reit has little value or depreciated in market price.

4) This rule is to protect shareholders, imagine property manager sold the asset at 50% discount to someone (or though RPT), surely shareholders benefit will be hurt. The rule is to prevent property manager sold the property at significant discount rate due to whatever reason or intention. Any special circumstance can always apply exemption from SC. So this is little case of asset illiquid.

Any guidelines/rules, you consider the unit holders benefit, where got people consider buyer or other party benefit one?
You want to sell your property as close as to the market value. Let say your property/house market value is Rm300K, do you consider buyer must make more than 10% profit, then you decide you must only can sell less than 270K?
It doesn't make sense.

Having reit is about having faith the property manager is managing property properly and generate rental income or yield to the shareholders.
Disposal of properties generally is not something good news to reit, what you want from reit is to expand the rental income scope and getting more properties into thier portfolio and diversified the asset and rental income.

Invested in reit is about expectation of fixed income through rental collection, just like buying a property and rent it out and collect the rent.

If one expect more return like 10-20%, reit is not a place to be. It is more like a fixed income instrument.
Reit is not ordinary share. It is another different class of investment. Risk wise and risk rewards ratio is different. Cannot take in ordinary share return to compare with reit.

The most important for ordinary reit investors, how much return and yield you can get through buying the reit in the market.

You buy Axreit at Rm2.00, it can genearate about 16 cents or little more for you then it is 8%+ gross yield
You buy Stareit at Rm0.86, it can generate about 7 cents, it is about 8% yield.

So reit price is adjusting to the yield attractiveness in general.
Properties revaluation or higher NAV is another bonus aspect, and investors out there don't buy the reit based on NAV but people buy reit due to the yield factor.
Investors buying share out there don't look merely on NAV alone, what investors want is hard real return each year. It is as same acorss stock market. We have a lot of property counter (not reit) that are trading at Rm1.xx but NTA is Rm3-4 as well, why? Because share price react to ability to generate profit to the shareholders.

This post has been edited by cherroy: Apr 10 2010, 12:21 AM

Some REITs do have "Unrealised Income" or "Fair value adjustment on investment properties" every year . If I'm not mistaken, those revalued property are counted in NAV, so when we buy a REITs, it already reflected the gained value on NAV. Unfortunately, some others REITs such as Stareit only revalue them once three year, hence there isn't any "Valuation fees" incurred. The guideline only asking a revaluation every three years, but most REITs do revalue every year.

And some REITs have syariah , some doesn't. When some do have, becareful because it maybe prohibited to have non-halal tenants, but the guidelines doesn't speak any of these. I wonder what the syariah fee for? Isn't the guideline be uniform about syariah issue?

There is too a Management Expenses Ratio:

Management Expense Ratio (MER) is computed based on total fees including Manager’s fee, Trustee’s fee , valuation fees and administration expenses charged to the Trust divided by the average net asset value during the year. Since the average net asset value of the Trust is calculated on a monthly basis, the MER of the Trust may not be comparable to the MER of other real estate investment trust/unit trusts which may use a different basis of calculation.

For the borrowing issue:

Borrowings may be used for the acquisition of real estate and single-purpose companies.

Unless otherwise approved by the trustee and the SC, the total borrowings of the fund shall not exceed 35% of the total asset value of the fund at the time the borrowings are incurred.

I think they do consider approving most of the borrowing above 35%? Isn't the debt ratio should be applied to all? Even some REITs are stating they are borrowing until 50%. And how they calculate it? Long term liabilities? What about short terms one?

I think they should solve these guideline. It's easy to confuse. That is only problem 2.

Thrid, it's about the share price, not the property. The main reason AHP2 disband is they wish to sell those asset and get their money back. These asset are worth more than their unit price, and they didn't bring much value for unit holder. Unit holder can only get return through appreciation of share price or the distributed income of unit trust. But for every sen of distributed income, the unit trust price drops. In the long tem, because of ex date, most unit trust fall below their IPO price and NAV, and I wonder will their unit price goes zero while NAV is increasing.

4, That why real estate are consider illiquid, because there are rules that prevent buyer to buy and seller to sell. Hence, REITs assets can be consider illiquid, and are very dependent to manager for appreciation of assets or increase of income. When these two factor doesn't come in, REITs can't gworth. That's a problem for Malaysia REITs, they can't get enough income which can't increase value of assets, thus stagnant yield and unit price. Moreover, most Malaysia REIT's NAV already reflected the "revalued" asset, but there is no increase of income and yield, thus discount to NAV become more and more. Either the increased income yield unit holder more realised gain, or the appreciation of assets increase unit price, making unrealised gain for unit holder. But Malaysia REITs do neither.

5, The EPU/NAV for REITs which measure how much gain for net asset value, range from 10% to 5%, average 7.5%, only 5 manage to achieve above 7.5% against 12 REITs (excluding AHP2 which soon disband), while yield average 8.5%, as most REITs have borrowing that could buy more asset and get more return. It means our assets are not running as efficient as I wish, 9.7% return before deducting 0.7% of managent fee. It's an alarm that REITs may not have an high return exceeding 7% without borrowing, and with shrinking unit price but increasing net asset value, REITs may see more disgruntled unit holder and in the long term request disband, such as AHP2.

Properties is required to be revalued every 3 years, that's for sure. But under reit, there are many properties, so the every 3 years period is not the same for each one, so you may see revlaution happen every year, but they will state which one is revalued in the period.

Borrowing cannot exceed 50% disregard long term or short term. can refer here http://www.axis-reit.com.my/images/axisrei..._08_chap1-8.pdf

Regarding the ex-date, deduct out the share price, as long as company is earning constantly through rental income, the lower price of the share price, the higher yield it is and more attractive.
It will not become zero. For eg. Stareit is earning 7 cents, so after 10 years, it deduct out 70 cents, so theorectically, it will become 0.86-0.70 = 0.16. It is not the case.
If Stareit is still continue rent out its properties, and earn 7 cents, I can assure the share price won't be 0.16. It is no braniner to see it will be 0.16 if it is still earning 7 cents.

Do not take ex-div which deduct out share price will devalue the share. It doesn't. The share valuation come from ability to generate profit/income to shareholders.
Share price will auto adjust by market force which dictate by yield factor.

For eg.
Axreit is giving out average 12-15 cents for the past few years, but share price of Axreit is higher than before because it managed to grow its earning, diversified and expand through acquisition which through private placement.


AHP2 didn't generate any income to the shareholder previously which is the major downfall of this reit and the reason why unit holder disgruntled, not about share price below or above NAV. So unit holders have no choice to liquidate the properties to get back the money. As said before, no one will want to invest in anything that doesn't generate income for them.

Reit is about renting, leasing properties which is the core income and attractiveness. You look for the properties can be rent out for long term.

You buy reit not because of NAV, you buy reit because about its yield.

As said, if wish to see return rate of 10%, reit is not a place to be.

It is as same as you buy a property then rent out only. The situation is identical to reit. You cannot grow your properties portfolio, if you have no new money or through borrowing. You cannot possible get more than 10% yield through renting out.

Rental market yield is about 7-8%.

Can I say that for property, most time there should be almost guaranteed capital gain whereas in REIT, the capital gains are mostly dictated by the market.

If that is the case, there would not be any serious problem such as Sub Prime Crisis.

Another danger of holding properties , would be " Asset Bubbles "

I mean no investment instruments are totally perfect and without risks.

It is just that you tend to understand more about REITS, so much so the risks are somewhat " reduced".

That is why forex traders see no risks at all in playing forex. Sure win one IF you know how.

This post has been edited by SKY 1809: Apr 10 2010, 09:34 PM

The Al-‘Aqar KPJ REIT recorded additional contribution to the income from the revaluation of properties in conformance with Financial Reporting Standard 140 (FRS 140) requiring the revaluation of all properties annually. The revaluation, announced on 31 December 2009, increased the valuation of the nineteen properties by RM 17 million, concurrently increasing the Al-‘Aqar KPJ REIT’s market value to RM 962 million.

The real estates shall be revalued at least once every (3) years from the date of the last valuation (or such other times as required under the Securities Commission Guidelines on REITs), or at any time where the Trustee, the Manager or the independent auditor appointed by Atrium REIT reasonably believes that there has been a significant change in the value of real estates.

They can revalue any time , any properties or annually revalue. Difer from one and another. Did you see the Stareit income statement for 2008, they don't have valuation fee? I wonder what the guideline trying to tell me, are REITs setting their own revaluation policy?

Regarding the ex-date, deduction of unit price is a pain. Imagine you brought Stareit and its IPO price is above RM1, now there is only RM0.86 left, that is the distribution amount you collected past years. It makes sense that price seems "attractive" when distributed profit hasn't changed much, but the price drop and drop. Example, Stareit pay 6 sen of dividend, with 5% on the very beginning, but till today, it still pay 6 sen, but it yield 8%, because the price droped and the more it drop, the more it seems more "attractive", but the truth is there is an unrealised loss and if you sell them they will incurred realised loss. And a particular truth is, now Stareit propose to reposition their REITs into a Hospitality REITs, that is not something that you want since IPO and you have two choices, either selling at a loss or continue to go along.

Story never end there, AHP2 may another sad story. There maybe more out there, only three REITs manage to have 120% gain since their IPO, 7% annualised gain on unit price, over the period of 3 years. Adding dividends, only these three manage to reflect their "appreciation" on properties, their high "yield" and their "expected" return that deflect inflation. Out of 12 REITs (excluding AHP2), 3 dipped below their IPO price despite the roaring market. The medicore 6 only manage to cling around 100%.

To make REITs a steady option to invest, at least REITs should reflect strong unit price. If one were to find an so called attractive yield of 7%, then he/she maybe dissapointed that the unit price dipped below purchased price, yielding 14% even though distributed income remain same. That is a loss of 50% of unit price, which I believe some of REITs perform during 2008-2009.

NAV doesn't reflect to share price, so does the yield too, the more the yield, the less the unit price, while the distributed income remain same.

And as you said, rental yield 7%, if one have RM1 and borrow another RM1 with 4% interest, it only have to pay 4 sen while collecting 14 sen, net income 10 sen, that already 10%, but the fact is REITs only manage to have a 7% of return on equity, that mean even though they borrow RM1 and have RM1, they only manage to earn 11 sen on a total of RM2, pay 4 sen of interest and another 7 sen for unit holder. That only 5.5% of return on total asset. Or they may pay more interest, which maybe perceived as more riskier.

This post has been edited by wwloon32: Apr 10 2010, 10:35 PM

HOW??

One should have the right concept before invest in REIT. If you are looking for quick capital appreciation, REIT may not be the right place for you. Technically, property will increase in value, but under certain circumstance, it will not.

So, why invest in REIT? Those people who have additional fund and want to invest in property for long term with intention to collect rental income are the one looking for this investment class. In fact, they are even more happy if the price of REIT fall below their buying price, as they can add more unit every year with even cheaper price, but in the same time increase in yield return.

Assume you buy a house for 100K and can rent for 8K each year. Now, someone from same row want to sell a same unit of house for 80K, would you buy it? I will buy it, as I know the house can rent out for 8K each year and in future people will realise its true value. I will not explain more, this is the secret of rich people making money.

Hypothetical question. I would have to look at my how much my borrowings Sometimes, opportunities like this can appear but if become too greedy and over leverage, you are asking for trouble.

Personally for me, I would also have property in addition to REIT. The REIT component to guarantee at least some cash generation & property for cash generation/capital gain purpose.

For revaluation issue,

Reit guideline has stated 3 years once at least.
New FRS stated every year. This is applied across all company account if they start to adopt the new FRS. This is not applied on reit only.

So I don't see any clash between the guideline and FRS. If adopted the new FRS, then every year revaluation once. I don't see an issue here. The new FRS every year revalaution means they will overwrite the guideline only.

There is no such thing of every reit adopted their own guideline.

If one view the ex-date distrubtion/dividend deduction is actually culprit of share price dropping, I can't help to explain more further (has been explained many times). In actual fact, it is not. Whether there is distrubtion or not, share price still will drop to 0.8x to match the overall market yield around 8% if Stareit cannot earn more than 6.+ cents. Market share price always respond and react to how much earning ability.

After the recent financial crisis, investors demanded more yield to justify their risk, especially with real estate is the main culprit of recent crisis and a number of overseas reit actually went under and have their own problem, mainly due to leverage issue.

If one view short term like that (ex-date of dividend deduct out the share price), then please don't buy any dividend stocks. No offence.

Stareit IPO price at 6.x% yield is not attractive enough for investors, that's why the share price drop to 0.8x become a 8.+% yield. Somemore Stareit DPU never go up at all and with the rationalisation plan uncertainty (new properties injection), then share price will be traded at this range for near term until situation become clearer and how much the future yield it will be.

As said before, you buy reit, you look at yield as primary factor, you don't look at its IPO price nor NAV, as this is secondary.

Look at how much IPO offer price at what expected yield, then only decide the price you are going to enter. If yield is not attractive enough as compared to overall market existing has, then high chance it will drop below IPO price or NAV.

Every reit situation is different, some may have rental revision for every 2-3 years, so if the rental being revised upwards, then there is positive contribution to the profit made.

To make reit price steady, the only and effective way to to have consistently earning power and may be some little improvement in income. (it is not possible to see earning of reit double or triple over short to mid-term, without expanding through borrowing or private placement.

If a reit is earning steady 7% over the long term, it is very unlikely to see its market price drop become 14%, as people will already snap up if the yield become higher and higher. It is no brainer for anyone to sell the reit which is yielding 14% and still able to earn steady and consistently over long period of time.
Except for some special circumstance like financial crisis which lead to risk of reit facing (like cannot find tenants, refinancing facilities is totally shut like what happen during 2008 etc) or FD interest rate become 7% which make 7% reit become non-attractive.

I need some clarification on income tax assessment. Already went to LHDN last week to ask about REITs "dividend" and the lady said that I don't have to declare the dividend from REITs. Is that true?

If that is so, why do I need to keep the "Tax vouchers"?

This post has been edited by kmarc: Apr 12 2010, 12:00 AM

It's true.
The tax voucher is for your record, and to substantiate your income in case of a tax audit.
For example, I remember Neo buys alot of REITs. He earns so much reit-dividend income. He doesn't need declare this. Then if he buys property with cash, IRB come knock on his door, ask him, "You declare only so little income, how come you can buy property with cash? You under declare your income is it?". Then Neo shows the IRB officer all his reit-dividend voucher. "Already 10% witholding tax la. See my reit-dividend RM200k. This is where the money comes from to buy the property with cash". IRB officer's eyes almost pop out, says "Ok. case closed."

Guidelines do change and different company have different revaluation, that leads to two earnings. In the next few years there will be changes and beware of different company that have different revaluation. If guidelines are mean to guide and uniform, why things have different interpretions?

Market share price doesn't reflect yields. REITs do have tendency of dropping even though earning and therefore yield is rising. Given the statistics of mid 2008, when markets did perform average, only half of 12 REITs manage to cling above IPO price, another half sinking below it. It average yield is 7%, compare to 8.5%, still REITs unit price perform sluggish, haven't recover, although earning and yield did improve. As the matter of fact, the top three REITs yield of 2008 unit price did fall, compare to 2010 unit price.

The main things is unit price, it doesn't go along with yields and NAV, it isn't as effective as you thought. If you opened The Edge, you will find our REITs are one of the highest yield in the world. And a point to counter yours, if REITs yields average on 8.5%, which make it more attractive compare to listed dividend counter and our country bond, REITs should attract these capital and make it yield lower in long term, but it didn't happen.

Owh, I see what you mean. Thanx for the clarification.