City&Country: On REITs and property stocks

Real estate investment trusts (REITs) and property stocks are alternatives to property investment. While both are listed on Bursa Malaysia, they offer different potential risks and rewards.

Hall & Chadwick Asia Sdn Bhd chairman Kumar Tharmalingam says some Malaysian investors still believe REITs are no different from property stocks. REIT managers, he says, have yet to make the retail investor understand that the base investment of REITs is quality real estate and its management.

“Malaysian REITs are still ‘small cheese’ compared to our neighbours, who came in later than us to promote REITs in the region. A lack of depth in the prime blue chip real estate sector has been our problem in REIT expansion, compounded by low yields in other cities,” he explains.

Kumar, who established the First Malaysia Property Trust in 1987 (a joint venture between Bank of Commerce and Austwide of Australia) and later managed the trust, says some regard REITs as defensive stocks because their performance is based on anchored long-term tenancy contracts that are not affected by market volatility in the short term.

The most common asset in a REIT is office space well located in city centres in well-managed properties managed that give investors growing returns, he says.

When investing in REITs, the first rule is the track record of the manager. Kumar explains: “In a boom time anyone who can spell office can build an office, but it’s the quality of the management that determines how much yield you can extract from it. The second rule is the quality of assets acquired.
This determines the long-term capital values of the investment.”

ECM Libra Capital Sdn Bhd head of research Bernard Ching says stocks could be a property investment option, but it is important to understand the potential risks as well as rewards.

Astute investors, he tells City & Country, could clearly earn above market returns by investing in property stocks during a bull market. However, it is not without risk.

“Investors must be ready to sell when the market returns. The equity market can also overshoot on the downside, investors may be able to pick up property stocks in a ‘fire sale’ — something many investors have been looking for in the physical market, but to no avail following the recent global financial crisis,” he says.

Among the other benefits of buying into a property stock are: Tapping into the expertise of professional managers, the stocks are more liquid than physical property and greater exposure to underlying properties not available to retail investors, such as hotels, malls, industrial properties and hospitals.

On the other hand, an investor has no control over the properties and would be exposed to the bankruptcy risk of listed companies. Stocks are also more volatile than the physical market, and the poor management of a company may dampen a stock’s performance. The stock market is also exposed to the vagaries of the global equity market which otherwise may have no impact on physical properties, Ching points out.

He advises buying for growth when investing in stocks and for dividend yield when investing in REITs. “Look for companies with a good sales track record, product delivery, earnings growth and landbank replenishment. Do your own research on the company, including its location of major landbank and the market segment it is in.

“Avoid highly geared property stocks, and don’t randomly buy any property stocks during a bull market as each property company is different.”

Kumar and Ching are among the speakers at the upcoming The Edge Investment Forum on Real Estate Investment 2010 titled “To buy or not to buy — Where to put your money?” on April 10, 2010. It starts at 9am sharp.

This article appeared in City & Country, the property pullout of The Edge Malaysia, Issue 800, Apr 5 - 11, 2010

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