Updated: Monday December 9, 2013 MYT 6:48:10 AM
Challenging time ahead with no all plain sailing for REITs
PETALING JAYA: Although local real estate investment trust (REIT) players can breathe a sigh of relief as they have been spared from the rather tough budget measures on the property sector, the coast is not all clear for the 16 REITS just yet.
Malaysian REIT Managers Association chairman Datuk Stewart LaBrooy said industry players, especially those in the office sector, had to deal with an office market that was expected to remain challenging as supply continued to outstrip demand.
In addition vendors of properties were asking for prices that were “totally unrealistic” with low cap rates in the face of a market that would be seeing an upward trend in interest rates and bond yields and with the looming oversupply of office space, rents were coming under pressure, Labrooy told StarBiz.
However he stated that REITs with strong leases would be able to ride out the storm until the market stabilised but those that didn’t might be impacted.
“REIT model works in volatile markets when they own assets that are acquired with long leases in place. Therefore most REITs can ride out the short term volatility evidenced in the current market.
“It’s the developers that build office space on speculation and have to hold their assets empty for long period of time on high gearing that will face huge problems in such markets,” Labrooy explained.
Much of the growth of the REITs has been organic as there has not been many buying opportunities in 2013.
Labrooy, who is also Axis REIT Managers Bhd chief executive officer, said REITs that didn’t grow their portfolios would find it challenging to get much headway in distribution per unit (DPU) growth unless there were strong strategies for organic growth.
On the whole, there is a shortage in supply of investment grade A assets in the market that are yield-accretive and allow for organic growth. Although the office sector is addressing the situation, he said the other sectors were still rather weak.
The REIT market also has to contend with lower market liquidity compared to markets like Japan, Australia, Singapore and Hong Kong. However this has been an advantage as the REIT stocks are tightly held by local institutional investors and hasn’t witnessed the sell-down by foreign funds witnessed in the Singapore and Hong Kong Markets REIT markets.
Basically REITs can enhance their growth potential through acquisitions, organic growth, disposal of assets, repositioning of assets through enhancements, and capital management.
Commenting on the cooling measures in the recent budget, Labrooy said overall the budget changes might prompt developers to relook at industrial developments as a diversification away from housing and this would benefit industrial REITs.
With the implementation of the full RPGT from Jan 1, 2014, he said vendors who sold their assets to REITs were exempt to the tax and so might encourage more sellers to exit through sales to REITs.
Meanwhile, the implementation of the goods and services tax (GST) from April 1, 2015 may dampen consumer spending, and will impact the overall retail sector’s performance.
Labrooy said the introduction of the GST would benefit those developments that were completing by the end of 2014 which would escape the effects of the GST.
Developers of industrial and commercial properties will not be affected but those who are involved in mixed development of commercial and residential will have problems in sorting the GST.
REITs will have to charge GST on rent and service charges but if their tenants can charge GST for their goods and services the effect will be neutral.
However, REIT acquisitions would be subject to GST and could have an impact on yields in the short term as prices would rise, he said. However the GST paid on the asset can be claimed back against GST on services provided to the buildings.
Despite the headwinds ahead, Labrooy said on the whole, REITs were well managed with conservative gearing, and did offer investors a safe haven to invest in.
“Our REITs have been very consistent in their performance given the strong management and high corporate governance their respective managers represent.
“Income and valuations have been trending up putting strong total returns in the pockets of the investors,” he said.
Labrooy said healthcare and industrial sectors continued to grow and presented opportunities for growth.
Publish date: 09/12/13