Seeking safety in REITs
Posted on | September 4, 2007
By THE EDGE
KUALA LUMPUR: Malaysian real estate investment trusts (REITs) offer investors stable income, capital preservation and potential re-rating arising from the positive government policy changes, say analysts.
The sector is also expected to benefit from the Budget 2008 proposals which will be unveiled on Friday and analysts expect several incentives for the REIT sector, especially after the incentives for the property sector that were announced earlier this year.
The current volatile market due to the fallout from the US subprime mortgage crisis, as well as the increasing risk premium would make REITs a safer investment for investors.
“Most Malaysian REITs distribute more than 90% of their distributable income which translates into an average yield of 5.3% to 7% for the financial years 2007 to 2009,” stated RHB Research Institute in a report.
It also pointed out Malaysian REITs were trading close to their net asset value, or on average, at price/net asset value (P/NTA) of 1.2 times and this would offer a degree of capital protection.
Explaining that Malaysian REITs were more attractive than bonds, it said REITs offered an average yield of 6.9% (FY08), which was 322 basis points and 230 basis points higher than the 10-year Malaysian Government Securities (3.68%) and 10-year Cagamas bonds (4.6%) respectively.
The research house said the US sub-prime crisis in July resulted in uncertainty in regional markets until the US Federal Reserve cut the discount rate, providing stability to the market.
It also said during that period, bonds (10-year MGS), Cagamas and Malaysian REITs saw comparable increases of about 7% to 8% in their respective yields.
“In addition, due to the low betas of Malaysian REITS (simple average of 0.62), share prices fell by only some 7.5% compared with the Kuala Lumpur Composite Index (KLCI) which declined by 14.4% (July 24 to Aug 17).
“This reflects the defensive nature of Malaysian REITS in preserving capital as well as its ability to protect income at a level that was similar to sovereign fixed income instruments,” it said.
RHB Research expected the sector to benefit from the Budget 2008 proposals, and incentives could range from lower REIT withholding tax, more incentives for sale of properties by owners to REITS while investment in developments projects would be allowed.
Although the REITS offered better yield compared with their regional peers, they were not as competitive as other regional players like Singapore, due to the relatively higher withholding tax of 20%. Singapore’s withholding tax is only 10%.
In the Budget 2007, the government reduced withholding tax from 28% to 20%. The research house expects more reductions could be announced in the 2008 Budget proposals.
It also said the abolition of real property gains tax (RPGT) in April this year could see the government providing more incentives to encourage property owners to sell their assets to REITs.
Such a proposal, if introduced, would increase the REITs’ investable asset base and spur growth in the industry, it added.
Another incentive could be to enable REITs to invest up to 10% of their total asset bases in development projects. The current rules only allowed acquisitions on completed and income-generating assets.
Such an incentive could expand the REITs’ investable assets base and it would apply particularly to developer-backed REITS like Quill Capital Trust’s major sponsors — CapitaLand Quill, Starhill REIT, UOA REIT-UOA Group — whereby the REITS could tap into high-yielding development profits of their sponsors.
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