Electricity tariff hike will have moderate impact on REITs

KUALA LUMPUR: The recent hike in commercial electricity tariff by about 16% in peninsular Malaysia will have a moderate impact on the earnings growth of Malaysian real estate investment trusts (REITs), said industry players.

Datuk George LaBrooy, chairman of the Malaysian REIT Managers Association, told The Edge Financial Daily that the electricity tariff hike is not the first price increase that Malaysian REITs had to contend with, deeming the hike on Jan 1 as “overplayed”.

He added that the impact on earnings will primarily depend on how the REIT structures its cost and revenue, as well as its portfolio property mix.

LaBrooy sees retail REITs and some bigger office REITs to be the most affected.

“I don’t think the (REITs that invest in) malls have that luxury; they will just pass the cost increase on to their tenants eventually come renewal,” he said.

REITs, which derive their income from the rental collected from properties they own, have to decide whether to pass on the increase in cost to their tenants, or to absorb it.

UOB Kay Hian Research, in its first-half 2014 outlook report, expects REITs to be moderately affected by the recent rise in electricity tariff.

“For REITs, electricity cost for commercial buildings will increase by about 17%. This translates into about 4% reduction in net profit,” the research firm said, noting that the higher electricity cost, which makes up 9% of the trusts’ revenue, will shave about 2% off their pre-tax margin of 52% currently.

It believes that REITs will bear the higher cost of electricity used for general purposes such as lighting and air-conditioning, while tenants will pay for their own electricity costs.

CapitaMalls Malaysia Trust (CMMT) chief executive officer (CEO) Sharon Lim said the trust expects to see a 17% or RM2 million to RM3 million increase in its utilities expenses this year.

However, in relative to its 2013 revenue of about RM300 million, she said the cost increase is not something too material.

CMMT, the country’s only pure-play shopping-mall REIT, accorded RM40.2 million in utilities expenses last year, accounting for 42% of its property operating expenses.

“The rise in electricity tariff would definitely have an impact (on our earnings). But if you were to ask if it is material to the point where my vehicle can’t work? No, it is not,” Lim said.

She added that under CMMT’s current lease agreements, any increase in utilities expense can be passed on to its mall tenants. However, the trust is still reviewing how to go about this matter.

For Axis-REIT, the impact of the electricity tariff hike is expected to be small as warehouses, which do not require much air-conditioning, take up half its portfolio

“There will be some impact, but we don’t think it’s going to be major. We don’t have huge electricity bills for our properties,” said LaBrooy, who is also CEO and executive director of Axis REIT Managers Bhd.

LaBrooy noted that for every ringgit the trust’s portfolio makes, 15 sen goes to operating costs, of which electricity cost takes up 30%-40%. Effectively, electricity cost takes up only 5%-6% of its operating expenses, a vast difference from CMMT’s 42%.

Axis-REIT recorded property operating expenses of RM20.8 million last year, on the back of RM142 million in revenue.

It is understood that REITs are embarking on energy saving initiatives in view of the electricity tariff hike, and for some, even before the tariff hike was implemented.

Retail REITs are said to be working with their tenants to use more energy-saving lights, and manage their air-conditioning temperature.

LaBrooy said Axis-REIT is studying to use solar panel at its properties as an alternative to drive down the cost of energy. “All the other CEOs of Malaysian REITs are on top of these issues,” he added.


This article first appeared in The Edge Financial Daily, on February 06, 2014.