Fakru Radzi Ab Ghani

KUALA LUMPUR (July 31): The Selangor State Development Corp, better known as PKNS, has postponed its initial target of establishing a real estate investment trust via its property investment unit PKNS Real Estate Sdn Bhd (PKNS RE) by 2018 to 2019, while it continues to look for good buys to raise PKNS RE’s total asset value to RM1 billion.

“The proposal to set up a REIT is an ongoing process, as many building owners are grappling with the challenging rental market,” PKNS chief executive officer (CEO) Noraida Mohd Yusof told The Edge Financial Daily in an interview.

“As for PKNS RE, they will need to improve their yield and at the same time scout for good assets, while waiting for the rental market to recover,” added Noraida, who is also currently chairing PKNS RE.

In 2015, this paper reported, quoting PKNS RE general manager Fakru Radzi Ab Ghani, that PKNS was looking to put its commercial property assets, which included the Shah Alam Convention Centre (SACC) Mall and Menara PKNS Petaling Jaya, into a REIT and list it on Bursa Malaysia within three years.

Now, Fakru Radzi, who is now PKNS RE CEO, said the new timeline to establish the REIT within the next two years is just a preliminary target as the country’s rental market is going through a challenging cycle, affected by many macroeconomic factors.

“The macroeconomic factors are affecting many building owners and we see tenants cutting jobs, and eventually relocating their business. Building owners used to be able to raise rental rates by 10% to 15% in the past, but today, to even raise the rate by 5% is a big challenge,” Fakru Radzi said in a recent phone interview with The Edge Financial Daily.

“As such, many building owners are willing to keep the current rental rates and will move to raise the rates when economic prospects further improve,” he added.

According to the Asia Pacific Real Estate Market Outlook 2017 for Malaysia, the Klang Valley market will continue to be a tenants’ market with no fluctuation in rental expected, while building owners will be more aggressive in attracting tenants.

“Overall, rental rates continue to remain flattish [but] investment prospects remain firm, driven by the depreciated currency which will favour foreign investment activities in Malaysia,” according to the report, which was published by real estate firm CBRE-WTW.

Ideally, Fakru Radzi said PKNS RE wants to increase its total asset value to RM1 billion before establishing the REIT.

“We own six assets, which are currently valued [at] close to RM700 million. To be more ready, we are looking for more good-quality assets — perhaps Grade-A office space — in prime areas,” he said.

One of the six assets is Menara Worldwide, a 25-storey office tower in Bukit Bintang. The remaining five comprise retail malls spread across Shah Alam, Bangi and Petaling Jaya.

Fakru Radzi said PKNS RE is still flush with ample liquidity and can take up another round of strategic acquisitions worth a total RM300 million, and that it has plenty of room to accommodate debt-funded buys.

PKNS RE’s gearing currently stood at 20%, and lower than 32% of the average gearing of comparable REITs with similar asset value that are listed on Bursa Malaysia, he said.

“This means we [can accommodate] strategic acquisitions, as well as asset enhancement programmes,” he noted.

Meanwhile, Fakru Radzi said PKNS RE will be diversifying its income pool by venturing into vehicle-parking management via its wholly-owned unit Park Here Sdn Bhd.

“We are looking at the possibility of acquiring a suitable parking asset in the central region of Selangor. This will complement our rental business, and provide a recurring revenue stream,” he said.

Going forward, Fakru Radzi expects its assets to generate a stable rental yield of around 5% to 6% this year, in line with the average market forecast of 6% that was projected by the Malaysian REIT Managers Association.

“When PKNS RE establishes the REIT, the assets will be valued and the yield may range between 5.5% and 6%. Still, we won’t be complacent, and will continuously perform asset enhancement to increase future yield,” he added, noting that PKNS’ retail assets have an average occupancy rate of more than 95%, while its office asset is 75% occupied.

This article first appeared in The Edge Financial Daily, on July 31, 2017.

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