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REIT growth is key to capital gains

KUALA LUMPUR: The Edge Financial Daily on Monday, July 26 wrote on the weak price performance of the two newly listed Real Estate Investment Trusts (REITs) — Sunway Real Estate Investment Trust (SunREIT) and CapitaMalls Malaysia Trust (CMMT).

It highlighted the fact that while capital gains for REITs may not be strong, the total returns for shareholders is very decent after adding back dividends or distribution per unit. All Malaysian REITs, even those now trading below IPO prices, have given positive total return to shareholders.

While high yields are likely to keep REIT investors contented, the key to capital growth in REITs is in raising overall yields and asset value, usually through yield-accretive acquisitions.

The lack of such yield-accretive acquisitions, or value enhancement propositions, is one of the key factors behind the lacklustre price performance of many REITs. It is not surprisingly REITs are often viewed as one-off exercises to realise the value of a developer's assets.   

"REIT growth is key, because unlike a company which can undergo business expansion, REITs are often injected at the height of their potential. And unit-holders still want to see a growth in returns," said an analyst.

Generally, returns can grow through increasing the REIT's net profit, changing the distribution policy or through property acquisition. The acquisition may be funded through internal cash reserves, a rights issue or a new issue of shares.

According to a study by The Edge Financial Daily, the earnings per unit (EPU), on average, for the 11 Malaysian REITs (excluding SunREIT and CMMT) have dipped 4.5%, from 15 sen to 14.4 sen, during the FY07 to FY09 period.

Starhill REIT stands out from the pack, having grown its EPU by 339%, from 6.9 sen in FY07 to 30.2 sen in FY09. The movement was mostly due to increases in fair value from property revaluations of RM274.4 million during June 2009.

AmFirst REIT also has a high growth rate of 73%, from 7.3 sen to 12.6 sen over the same period, largely due to property revaluation of RM23.5 million during the year ended March 31, 2010.

Al-'Aqar KPJ REIT, the most active REIT acquirer, is another REIT which has enjoyed higher EPU growth, totalling 49% from 7.5 sen to 11.1 sen from FY07 to FY09.

In FY08 and FY09, Al-'Aqar KPJ REIT, the sixth largest REIT by capitalisation, introduced 14 more properties into its portfolio, comprising hospitals, an office building and a nursing college at a total cost of RM451.6 million.

On July 6, Al-'Aqar added a further seven medical properties as well as a hotel for a total of RM383.4 million, raised partially by cash and a new issue of shares. It remains to be seen how this will affect the unit-holders in the coming financial year.

In contrast, Quill Capita REIT and UOA REIT appear to have suffered lower EPU over the years, falling by 68% (from 26.3 sen to 8.5 sen) and 48% (40.7 sen to 21.3 sen), respectively, from FY07 to FY09, mainly due to a slowdown in property appreciation gains.

Based on annual reports, Quill Capita's net appreciation in fair value of properties was RM57.1 million in FY07 compared to a total of RM3.5 million in FY08 and FY09. Likewise, UOA REIT's properties appreciated RM29.1 million in FY09 compared to RM78.8 million in FY07.

In order to increase their current yields, REITs should consider the future values of each new asset in their portfolio.

A manager should consider the net effect of a new acquisition on portfolio yield. For example, funding the acquisition with borrowings charged at an effective interest rate higher than the yield will lead to a fall in the portfolio's overall return.

For the two new listings, SunREIT and CMMT, the prospects for acquisition look bright.

SunREIT had said it aims to double its asset base in five to seven years, whereas CMMT has the first right of refusal to acquire CapitaMall Asia's properties. CapitaMall Asia is one of Asia's leading shopping mall developers, managers and owners.

However, valuation of any new asset acquired will be key to the REIT's value and yield.
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