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MREITs to stay strong, retail investors ‘spoilt for choice’

KUALA LUMPUR: Industry players are positive about the outlook on Malaysian Real Estate Investment Trusts (MREITs) for the next half of 2010.

In view of improving underlying property market, improving economy and attractive yields, Sherilyn Foong, associate director at New Asia Capital, believes that it is a good time to enter the MREITs market now.

Of late, there have been announcements of new listings for SunCity and Qatar REIT, while property developer Sunrise has also announced its intention to introduce a REIT listing. A number of REITs are also reported to be growing their asset portfolio.

Foong said this was good news for MREIT investors as they would be spoilt for choice, in terms of participating in existing as well as new REIT issues.

“These recent developments also signal the next phase of maturity of the MREIT market in terms of increasing breadth, depth and variety of issues,” Foong said.

According to Stewart LaBrooy, CEO and executive director of Axis REIT Managers Bhd, the recent developments would make MREITs a RM18 billion market sector with much higher liquidity that would attract foreign funds.

At present, MREITs have to contend with low liquidity due to their “very narrow” shareholder spread, said LaBrooy.

“The majority have 2,000 unitholders or fewer, and the stocks are tightly held by local insurance, pension and mutual funds,” he said. “On top of this, many MREITs have a small market capitalisation compared to their counterparts in Singapore. As a result, they are not on the radar of foreign funds.”

Kumar Tharmalingam, chairman of Hall Chadwick Asia Sdn Bhd, agrees. “With the advent of mega REITs (in the Malaysian context) of more than RM4 billion by companies like Sunway, we will get on the radar of foreign funds,” Kumar said.

“The bottom line is when the interest does come in, there will be interest in the whole sector, and not just in one big REIT.”

He added that MREITs were on the verge of recovery. “As their properties are revalued, there should be an upside review in values in the third quarter when the new REITs are launched.”

LaBrooy believes that with the entry of foreign funds, a reset of pricing in the market may take place.

“Yield spreads could narrow by up to 100 basis points, with a corresponding rise in stock prices,” he said, adding that fundamentals show that MREITs are still trading at a discount to their NAVs, with some going as high as 30%.

“This means that as property prices rise, we will see these stocks find favour with investors who will be seeking to buy assets at a discount, and ride on the possible reset of pricing.”

Industry players also shrug off the impact of rising interest rates.

A Maybank Investment Bank research report in late March indicated that there would be minimal impact on dividend yields from rising interest rates with 57% of MREITs’ loan facilities being long term with fixed rates.

“Most REITs have locked in their interest rates for three to five years, taking advantage of the low interest rates that have prevailed,” LaBrooy said, adding that with inflation, there could also be a rise in rents which will cushion the effects of higher interest costs.

“Because we are so lowly geared as an industry, any rise in the interest rates impacts only 30% of our total capital employed.”

 This article appeared in The Edge Financial Daily, May 4, 2010.

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