#The Edge Forum* Potential upside for Malaysian REITs

KUALA LUMPUR: The combined effects of a strengthening ringgit and rising inflation are pushing Malaysian real estate investment trusts (MREITS) into the spotlight. This is also prompting anticipation that MREITs unit prices will trade higher and closer to their net asset values (NAV) in the next six months.

Hall Chadwick Asia Sdn Bhd chairman Kumar Tharmalingam said a firmer ringgit would encourage foreign investors to acquire local assets such as REITs, deemed a hedge against rising inflation as Malaysia's economy gained further momentum.

A company's NAV or book value indicates the total worth of the company's assets that shareholders would receive should the business be liquidated. Comparing a company's share price to its NAV will tell whether a stock is under- or overpriced.

"It's very positive," Kumar told reporters on the sidelines of The Edge Investment Forum on Real Estate on Saturday April 10.

The MREIT market began to make its presence felt since 2005 following similar trends in regional countries like Singapore, Hong Kong and Japan. Malaysia now has about 10 REITs since the first entity Axis Real Estate Investment Trust was listed on the local exchange in August 2005. Other REITs include Quill Capita Trust, Starhill REIT and UOA REIT.

Kumar whose company offers corporate real estate services said there is potential upside to unit prices in entities like Axis, Quill, Starhill and UOA. This is because these REITs have plans to make their assets more vibrant to attract foreign investors.

In his presentation at the Forum, also explained that a REIT is essentially a trust fund which invests in real estate for rental income which, in turn, is distributed as dividend to its unit holders.

Unlike unit trust products which are sold via banks or agents, REITs, like other listed companies' shares are traded on the stock market, hence, allowing investors to lock in capital gains via changes in prices of the securities. "(A REIT) is a liquid proxy to physical assets," Kumar said.

Malaysia's central bank had in March this year raised the overnight policy rate by 25 basis points (bp) to 2.25% after keeping the country's benchmark interest rate at 2% at seven consecutive monetary policy committee meetings. Economists foresee a 100bps rate hike in the country this year.

According to Kumar, investors usually park their money in countries with higher interest rates to generate better returns from their funds. Investors also prefer to invest in a country deemed to have positive long-term fundamentals, but foreign funds can also come in due to the potential of quick gains which denote speculative elements in the local market.

For example, anticipation that the ringgit will strengthen will spur overseas investors to acquire local assets such as stocks and real estate. This, essentially, translates into double gains for foreign investors when they sell their assets as they will be able to reap both the currency exchange gains, and capital appreciation of their assets, said Kumar.

The ringgit was traded at RM3.1873 against the US dollar on Friday April 9, the strongest point in 23 months since May 9, 2008. Malaysia's inflation, as measured by the consumer price index, rose by an annual pace of 1.2% in February this year.

For the full report on The Edge Investment Forum on Real Estate 2010, read the April 19, 2010 issue of City & Country, the property pullout of The Edge Malaysia.