August 16th, 2014

A GROWING number of institutional asset owners are looking to unlock the value of their assets by parking them under real estate investment trust (Reits). There are a number of ways to do this including by way of setting up a new Reit vehicle, or by way of buying over an existing Reit or a Reit management company.

Malaysian Reit Managers Association chairman Datuk Stewart Labrooy says although starting a Reit from ground zero is possible, the process takes time and there is also the question of harnessing a meaningful investor following.

“In addition, there has to be a meaningfully large portfolio to be injected into the Reit that involves asset value of some RM500mil to RM1bil,” he tells StarBizWeek.

Labrooy says there have been a number of cases involving the buying over of Reit management company including by YTL Corp Bhd of a 26% stake in Macquarie Prime REIT and 50% of Prime REIT Management Holdings from Macquarie for S$285mil (US$189mil) in 2008.

Frasers Centrepoint Ltd bought 40% of Hektar Asset Management, the manager of Hektar Reit, in 2012; and the latest deal involves Malaysian Resources Corp Bhd’s (MRCB) proposal to buy into Quill Capita Trust.

Last month, Sime Darby Bhd was said to be eyeing Axis Reit or the management company, Axis REIT Managers Bhd as a vehicle to monetise its commercial properties.

But Axis REIT Managers had since clarified that there has been no communication or discussion between any of its shareholders and Sime Darby on the matter.

On what kind of valuation can be expected in the event of a takeover offer, Labrooy says: “It all depends on what premium the Reit manager can deliver on the fund’s assets. Good managers can normally command much higher premiums.”

Labrooy says the availability of suitable assets that are yield accretive can be very challenging, especially for the office and mall sectors, “where prices are currently sky high and yields are low.”

“As such, the acquisition policy of the Reits is either from third parties or from their respective promoters.

“What can be done would be to allow the Reits to develop up to 10% of their asset size like in Singapore and Hong Kong, where the regulators have recognised the difficulties of Reits to grow in the traditional manner.

“There are a large number of malls and offices being built both in the Klang Valley and Johor that could over time become acquisition targets for Reits with those asset classes in mind. The glut may drive down prices and offer Reits an opportunity to acquire assets at more attractive prices,” Labrooy explains.

He advises Reit managers to read the market cycle and act accordingly.

On the outlook for local Reits, Labrooy says recent announcements show that they are maintaining their performance.

But there are headwinds in the horizon including a rise in overheads including electricity, operational expenses and assessment rates, as well as a glut in the office sector and falling tourist arrivals.

“Reits are essentially financially sound as they are fully asset backed. The policy of growth rests with the board of each Reit manager. There are variations among the various asset classes. The larger market cap Reits (those above RM1bil in market capitalisation) are performing better than the smaller ones and are commanding premiums to their net asset value. It points to the ability of the respective manager to grow the size and returns of the various trusts.

“However, if the manager can’t demonstrate to the market a growth plan for their assets or increase their distributions to unitholders year–on-year, they will trade at a discount to net asset value,” he says.

Labrooy, who is also Axis REIT Managers Bhd chief executive officer, says the total asset value of Axis Reit will increase to RM1.87bil after the acquisition of three new properties in Shah Alam of which sale and purchase agreements have been executed.

It has also made letters of offer to buy two industrial facilities in Prai and Johor worth RM191.5mil. The vendors have accepted the letters of offer from Axis, and with these two latest assets, the Axis Reit fund will cross the RM2bil mark.

The acquisitions of all these five properties are expected to be completed by the end of this year that will increase its asset portfolio to 35.

On the potential contribution of the new assets, Labrooy says the properties are expected to generate a net income (before financing cost) of 7% each.

“Based on the projected unit holdings, the five properties will be able to yield an additional 2.1 sen a year to our income distribution per unit for 2015,” he says.

Explaining its asset expansion strategy, Labrooy says: “We do not buy real estate for the sake of growing. In 2013, we held back from acquiring any asset because the market was overheated and asset prices were inflated with low yields. Therefore, we held back buying anything until this year when we see valuations and yields returning to normalcy.”

Labrooy says Axis Reit has also been actively involved with asset enhancement initiatives (AEI) for its portfolio that involves the continuous improvement of assets to attract higher rentals and better returns. Recent AEI projects include Quattro West, Infinite Centre and Axis Business Park. It is currently working on Axis Business Park Block C.

“The AEI drives rental and valuations, providing our unit holders with more valuable real estate and dividend returns in the long term,” he says.

Labrooy explains that Axis Reit has one of the highest free floats of their units in the Reit space, with only 16% of the units being retained by the promoters.

“However, we are heavily subscribed locally with our international component remaining low at 7.64%. From our experience, the interest from foreign investors is triggered when a fund size is larger than US$1bil.”

Labrooy says although there has been growing interest in Axis Reit from foreign funds, the stock’s liquidity is still not optimum to attract many international funds.

“So our initial target will be to cross the US$1bil mark. However, in saying that, there is no optimum asset size for Axis Reit. We hold a firm belief that we are not in a contest to see how big we can become but rather what assets we can add to the portfolio that will reward our unit holders in the long run. We will grow but only with quality,” he says.

- Malaysia Property News