10 May 2014

Investors may turn neutral on REITs

  10 May 2014


THE initial negativity surrounding real estate investment trusts (REITs) may be dissipitating but the market is not expected to have the same buoyancy as in the previous years, says Sunway REIT Management Sdn Bhd CEO Datuk Jeffrey Ng.

Ng says “the negativity has turned neutral” based on a meeting with fund managers some weeks ago in which foreign funds were considering the more defensive counters.

Sunway REIT is the manager of SunREIT with total portfolio assets valued at RM5.18bil as at June 30, 2013. Although it is often compared with KLCC REIT, it is a distant second to KLCC REIT’s RM16bil with its main competitors being Pavilion Real Estate Investment Trust (PavREIT by Malton Bhd), CMMT by CapitaMalls Malaysia REIT Management Sdn Bhd and IGB REIT.

“Sunway REIT is still a busy asset manager, with fundamentally strong net property income (NPI) and distribution per unit (DPU) levels,” Ng says.

“The fund managers have stopped selling and have started to look at us again, despite concerns about interest rates increasing. For Malaysia’s top five REITs, the downside risk has minimised compared with 10-year Malaysian government securities (MGS).”

REITs thrive in a low interest environment and that was the situation the last several years, Ng says.

The last three years were particularly good for the Malaysian REIT market with SunREIT giving total returns of about 30% a year, says Ng. Those days are over.

On the overall outlook till the end of year, he says there will be positive total returns if the overnight policy rate (OPR) remains at 3%.

“Total returns will not be 30% (as before) but 10%, plus minus,” he says. Bank Negara left the OPR unchanged at 3% on Thursday.

REITs had a good run prior to tapering of bond purchases by the US Federal Reserve about a year ago. SunREIT enjoyed a high of RM1.65 between May and June 2013 but slid to a low of RM1.23 on Dec 18, 2013. It went up a bit thereafter and closed at RM1.37 yesterday.

For the third quarter 2014 results announced on Apr 29, the management proposed a DPU of 2.10 sen, an increase of 1.9% over a year ago, bringing cumulative DPU to 6.33 sen (cumulative 3Q2013: 6.28sen). This translates into an annualised distribution yield of 6.2% based on the closing price of RM1.36 on March 31, 2014, according to a press release from SunREIT.

In a separate emailed response, Ng says: “The uncertainty about the effects of higher interest rates will likely increase the volatility of M-REITs (Malaysian REITs) going forward. This is attributed to investors’ beliefs that REITs are yield-sensitive investments that invariably perform poorly in a rising interest rate environment.”

Ng compares REITs with the 10-year MGS yield which has crept up since Ben Bernanke (former US Fed chairman) announced plans to taper Qualitative Easing in stages since late May 2013.

Yield has moved from 3.36% in April 2013 to 4.11% in March 2014 (+75 basis points), he says, while M-REITs’ average dividend yield has decompressed to an attractive level from 6.26% to 6.99% during the same period under review.

Given the improvement in the US economy, Ng says investors have generally moved from defensive plays to high beta stocks for potential higher returns.

“However, we believe M-REITs with attractive assets and fundamentals will continue to appeal.”

The implemention of goods and services tax next April, will have little impact as the taxes will be passed on to tenants.

“The question is whether malls operators want to pass on the whole 6%, or part of it,” he says.

On Sunway REIT’s plans to increase its current portfolio size of RM5.18bil to more than RM7bil in one to three years, Ng says it is on track to do so, supported by “a pipeline of assets” worth between RM2bil and 3bil from its sponsor Sunway Bhd. The RM460mil asset enhancement initiatives for mixed integrated development Sunway Putra Place, for example, is also contributing to the portfolio expansion.

It will adopt a complementary strategy of balancing assets which are already in the pipeline with third party assets in order to build their position to be one of the largest retail-focused REIT.

“It is our strategy to remain retail-focused with at least 60% retail exposure measured by asset size, revenue or NPI over the long-term,” says Ng.

Opposing objectives

Although SunREIT is a diversified REIT with hotels, offices, malls and a hospital component, up to 64% of SunREIT’s total portfolio is retail-focused. By diversifying into hotel (22% of total portfolio), office (8%) and healthcare (6%), Ng says it will be able to achieve gains from different sub-sectors and avoid concentration risk in any one asset class. CMMT, by comparison, is a pure retail REIT while PavREIT is not 100% retail as Pavilion Tower, an office block, is part of it.

“There are investors who may prefer pure REITs as they would like to do their own portfolio allocation and not be exposed to risk of different asset classes in diversified portfolio,” says Ng.

On how SunREIT is going “to get money” when the Malaysian REITs operate on a model which distributes at least 90% of its income to unitholders, he says property assets can be enhanced via capital expenditure which is normally funded through borrowing or equity.

Because of this 90% income distribution model adopted under the Securities Commission (SC), all REITs have to continue to borrow or raise equity in order to grow, he says.

Another option is “to fund our acquisition growth via issuance of new units either through placement to new or existing investors or rights issue to existing investors,” he says.

“(The) current REIT model is to meet the objective of distributing a steady dividend income to unitholders, he says.

Ng says at a current gearing of 32%, Sunway REIT has “a debt headroom” of RM970mil to fund capex and acquisition before it touches the permissible 50% level.

On Sunway group being a conglomerate with sprawling interests, and the prospect of related party transactions (RPT) is inevitable if it decides to inject assets into SunREIT, Ng says in an email: “We have three independent directors with relevant knowledge, skills and experience, who form the audit committee among others to ensure following standard operating procedures.

These include:

> Independent valuation by a qualified valuer and valuation report will be lodged with SC;

> Non-independent directors cannot vote for the acquisition;

> Acquisition is subject to audit committee’s and trustee’s approval;

> Trustee can appoint another independent valuer if necessary in exercising its obligations;

> SC can appoint another independent valuer if they are not satisfied with the valuation report submitted;

> Unit holders’ approval required for acquisition amounting more than 5% of total asset value;

> An investment must also meet the criteria that have been endorsed by the board.

On where there is greater transparency than one who buys a property from a third party and injects it into the REIT, Ng says regulatory compliance and transparency are equally important for third party transactions.

“The investment appraisals for both RPT and third party transaction are equally stringent. In term of the standard operating procedure, RPT is more stringent than third party acquisition,” he says.

On how the proliferation of malls will increase competition among mall owners/operators, Ng acknowledges that the number of malls have indeed increased with 100 malls coming onstream every decade, bringing the total to 350 malls today.

Datuk Desmond Lim, from the Malton Bhd group is reportedly building two malls – one in Pusat Bandar Damansara and another in Bukit Jalil. A second mall is being planned in Bukit Jalil, by another developer, although this is yet to be confirmed. In Johor, a couple of malls are being planned by Kuala Lumpur-based developers.

Says Ng: “It is now a question of quality versus quantity. With more choices shoppers expect better run malls.” That means offerings, ambience, concepts and delivery must come together to add to the shopping experience.

Two of the most popular malls in the city today are Suria KLCC and Pavilion KL, which accounts for Suria KLCC rental at RM20 per sq ft.

Sunway Group managing director (property investment division) Datuk Ngeow Voon Yean says rental for Sunway Pyramid in Petaling Jaya is RM12 per sq ft – which is considered a decent figure – while its Penang Sunway Carnival mall averages about RM5 per sq ft.

Putra Mall near the PWTC Trade Centre was between RM4 and RM5 per sq ft before the current on-going refurbishment. A “double-digit revision” may be on the cards, says Ngeow.

He says some examples of recently completed asset enhancement initiatives include the RM40.1mil expansion of Sunway Pyramid Shopping Mall known as Oasis Boulevard Phase 5, the RM16.9mil chiller retrofit exercise at Sunway Pyramid and the RM17.4mil refurbishment exercise at Sunway Hotel Seberang Jaya. Some of these initiatives are expected to yield double-digit return on investment, which is only to be expected as some of its malls started at a rather low base years ago.

This means things are really brewing in the local retail scene.


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