REIT disappointment temporary

KUALA LUMPUR: Despite the hype about real estate investment trusts (REITs) and the listing of two mega REITs this month alone — Sunway Real Estate Investment Trust (SunREIT) and CapitaMalls Malaysia Trust (CMMT) — their performance on Bursa Malaysia so far has been unexciting.

SunREIT was priced at 88 sen for retail investors and 90 sen for institutions. The REIT, which debuted last Thursday, July 8, ended last Friday at 89 sen. CMMT had fixed its retail price at 98 sen and RM1 for institutional investors. It ended at 99.5 sen last Friday after making its debut on July 16.

Should investors be worried about their relatively weak price performance?

In all fairness, the REITs are not alone. Half of the 16 initial public offerings (IPOs) this year closed below their offer prices on the first day of trading, and all but a handful are below water. This reflects the market's lethargic performance and the lack of track record of the new listings.

In that respect, the REITs have fared much better than many IPOs. While there may not be capital gains, the short- and medium-term yields are relatively assured due to the secured leases for their buildings. Thus, yield-motivated investors need not be unduly concerned, as long as the yields remain intact.

Indeed, The Edge Financial Daily's study of all Malaysian REITs listed since 2005 suggest all investors are still making positive returns after including distributions or dividends.

REITs making a comeback, but is the timing 'right'?
A real estate or property trust fund is an investment vehicle that invests or proposes to invest at least 50% of its total assets in real estate.

Axis REIT was the first REIT to be launched in August 2005, after the government introduced regulations to promote the establishment of REITs. Since then, Malaysia has seen an influx of REITs, with three to four listings a year until 2007. There are now 13 listed REITs, including SunREIT and CMMT.

Prior to the latest two listings, the largest was Starhill REIT, with a current market capitalisation of about RM1 billion, compared with an average market capitalisation of RM466 million for the 11 players.

With the onset of the 2007-2008 global crisis, all was quiet on the REIT front until this year, when the Malaysian public saw a renewed appetite for REITs as SunREIT and CMMT burst onto the scene on July 8 and July 16, respectively.

SunREIT was the biggest REIT in Malaysian history and the largest IPO this year, with a current market capitalisation of RM2.47 billion.

Despite the size, publicity and strong branding of its underlying assets, SunREIT closed at 88.5 sen on the first day of trading, down 1.5 sen from the IPO price of 90 sen for institutional investors, but with still a mere 0.5 sen profit for retail investors who purchased the units at 88 sen. It last traded at 89 sen.

Records show that SunREIT's stabilising manager RHB Investment Bank has initiated stabilising action. It is unclear if this was to absorb selling pressure from investors, particularly retailers looking for quick gains.

RHB has purchased SunREIT units on eight occasions between July 8 and July 20, with total purchases of 40.6 million units or 47% of the total units oversubscribed. Stabilising action can only be carried out up to the total number of oversubscribed units of 87.3 million.

Despite SunREIT's popularity among institutional investors, analysts and the public alike for its well-branded assets, yield and defensive nature, plus the presence of three cornerstone investors, the issue was only oversubscribed 1.01 times.

Furthermore, SunREIT's listing was delayed twice while the management was awaiting the "right time".

The "right time" horizon for a REIT originator and investor is very different. A property owner will ideally want to list a REIT with the best possible prices for its assets. Often, this also means near the peak of a property cycle. But conversely, this also means limited upside for potential investors.

So, this begs the question: What is a "right time" for investors? Or are REITs not the "right" investment?

Short-term underperformance, but decent longer-term returns
From our study of Malaysian REITs, it is generally found that REITs often offer poorer capital returns to the short-term investor, but returns for medium- and longer-term investors, including dividends, are still very decent.

The average first-day capital gain upon selling newly-listed REITs from 2005 to 2007 is merely 6.1%, based on the average of all 11 REITS listed then. The average falls to 4.8% if we include SunREIT and CMMT.

Of the 13 REITs currently trading, seven closed above their IPO price on the first day of trading and six closed below.

Of the lot, Axis REIT was the best performer, rising 34.4% on its debut. It was followed by Quill Capita Trust (16.7%) and Al-Hadharah Boustead REIT (13.1%).

At the other end of the spectrum, AmFirst REIT was the worst performer, falling 11% on its first day of trading, followed by Atrium REIT (down 6.5%) and CMMT (down 2.5%).

Based on a study published in the Malaysian Institute of Accountants' (MIA) January 2010 publication, the average initial returns of non-REIT first-day IPO listings during the same period was 28%. The sample included 134 companies.

Interestingly, industry observers also said it was perhaps the scarcity of REIT IPOs that led to them being overvalued by underwriters and the investing public.

Dividends boost overall returns
REIT investors should not just look at capital gains, as the high yields are their main attraction. Malaysian REITs generally offer yields of 7%-9%. By comparison, the KLCI's dividend yield as well as bank deposit rates are below 3%.

"REITs are more likely to appeal to certain classes of investors. Those with a defensive investment strategy will be partial to REITs, which are generally more resilient in the face of an economic downturn," said an analyst.

For the 11 REITs listed between 2005 and 2007, the total capital gains to-date averaged 18.1%, based on the difference between their IPO and Friday's closing prices (see table).

The top gainer was Axis REIT with 68.8%, followed by Al-Hadharah Boustead REIT (35.4%) and UOA REIT (24.3%). Three REITs are still trading below their IPO prices — Starhill REIT, Atrium REIT and Amanahraya REIT.

When the distribution or dividend for these REITs over the years is included, the total return to shareholders are significantly higher (see table).

For example, Axis REIT, the best-performing REIT gave a total to-date return to shareholders, including capital gains and dividends received, of 118.7% versus a capital gain of just 68.8%.

This is because shareholders have received dividends totalling 62 sen through the years. Al-Hadharah Boustead REIT, the next best performer, has total return to shareholders of 66.9%, as compared with a capital gain of 35.4%. UOA REIT gave total returns of 57.9% versus a capital gain of 24.3%.

Indeed, even though three REITs are still trading below their IPO prices, their total returns are positive, at 17%-19% each. Thus, a long-term investor in any Malaysian REIT would still be in the black, once dividends are imputed.

On Tuesday, we will take a look at how REITs can grow their capital values.