The force awakens – The rise of Malaysian REITs

DO you know that with an investment of as little as a few hundred ringgit, you could effectively own a piece of Malaysia’s most iconic real estate assets such as the Petronas Twin Towers, Pavilion Kuala Lumpur, Mid Valley Megamall, Sunway Pyramid Mall and receive a share of the rental income as well as long-term capital upside from appreciation in asset value?

Also, are you aware that behind the scenes, this investment is managed professionally and adheres to strict corporate governance and regulations?

As the name suggests, Real Estate Investment Trust (REIT) is a professionally-managed fund which owns and manages income-generating real estate for consistent quarterly or semi-annual income distribution to unitholders (equivalent to dividends for shareholders in the context of public-listed companies). REIT also provides potential long-term capital upside arising from gain in fair value of investment properties, acquisitions and asset enhancement initiatives.

In Malaysia, REITs have come a long way since the first Malaysian REIT (M-REIT) was launched in August 2005, increasing at a whopping compounded average growth rate of 34% per annum in market capitalisation from less than RM500mil in 2005 to RM40bil in 2020, backed by more than RM50bil in assets under management (AUM), comprising many iconic landmarks and diverse asset types such as retail malls, hotels, offices, industrial properties, warehouses, education properties and hospitals. In fact, 17 listed M-REITs own and manage 10% of retail mall space and 5% of office space in Malaysia, contributing substantially to the national economy and real estate landscape, with room for further growth in the coming years and decades.

M-REITs have always been the choice of institutional investors, such as sovereign wealth funds, pension funds and mutual funds, indirectly benefitting many Malaysians who invested in these funds.

Directly, many retail investors have benefitted from the consistent income distribution and potential capital upside of M-REITs.

This retail participation in M-REITs is particularly relevant in a time when the overnight policy rate or OPR has declined to a historical low of 1.75% amid the global Covid-19 pandemic, further diminishing the interest rates on bank deposits.

When adjusted for long-term inflation and opportunity cost in a growing economy, our hard-earned cash savings are subject to erosion of value due to inflation, especially with the record levels of quantitative easing and low interest rates across the world since the 2008 Global Financial Crisis and the ongoing Covid-19 pandemic.

Portfolio growth

On the flip side, M-REITs benefit from these lower interest rates and borrowing costs, allowing M-REITs to strategically and opportunistically acquire assets from motivated sellers during this unprecedented period, which enhances portfolio growth and potential capital upside post-Covid-19.

Combining income-generating and appreciating real assets with the liquidity and ease of investment of equities, M-REIT unitholders stand to enjoy the best of both worlds.

Unitholders are able to invest as little as a few hundred ringgit of their cash savings over the long-term in portfolios comprising some of the most iconic and prime real estate assets across the country.

Unitholders also enjoy the flexibility of investing in listed REIT units in the same manner as investing in any equities listed on Bursa Malaysia which are liquid as opposed to investment in physical real estate.

Spreading investment risks

Moreover, unitholders can diversify across multiple REITs for exposure in different geographical markets and property segments, spreading investment risks across diverse portfolios instead of betting everything on a single property.

What’s more, M-REITs are managed by professional REIT and property managers, ensuring all aspects of ownership, leasing and management are well taken care of – from acquisitions to maintenance to payments of insurance, quit rent and assessments, as well as strategic asset enhancement initiatives to upkeep and enhance property values for long-term portfolio growth.

This allows unitholders to enjoy a hassle-free investment experience without having to be actively involved in the complexities of real estate investment.

In comparison to other equities which practise discretionary dividend payout policies which average between 30% to 60% of the company’s income, M-REITs are committed to distribute at least 90% of income to unitholders in order to enjoy tax transparency, i.e. income is exempted from tax at the REIT level.

Most M-REITs distribute close to 100% of distributable income, contributing to the stability of income received by unitholders as well as relatively lower volatility in unit prices, which supports a long-term “buy and hold” strategy.In terms of corporate governance, M-REITs are highly-regulated and are uniquely structured as a trust which is governed by a trust deed under the purview of independent trustee and board of directors.

Experienced professionals

REIT managers, comprising experienced and highly-skilled professionals, are appointed to manage the asset portfolio, deliver financial returns and enhance long-term unitholder value.

The clear segregation of roles, transparent disclosure requirements, and regulations such as Bursa Malaysia’s Main Market listing requirement and the Securities Commission’s listed REIT guidelines ensure that the interests of unitholders are upheld to the highest standards.

As a collective voice and representation for the M-REIT industry, the Malaysian REIT Managers Association (MRMA) was formed in May 2010.

Over the past decade, MRMA has continued to work closely with the government and industry stakeholders to establish a robust framework for the development of the REIT industry, improve transparency and develop common workable standards in line with international best practices in the areas of financial reporting, disclosures and corporate governance.

Some of the successful milestones achieved by MRMA included the establishment of the Bursa Malaysia REIT Index, and the inclusion of greenfield development as a permissible investment, which provided further growth opportunities along the property value chain.

Conducive environment

MRMA actively champions the industry to drive towards a more conducive environment for industry players to operate and grow.

MRMA was also invited by the Economic Action Council as the lead representative of the M-REIT industry to provide valuable recommendations to mitigate the business disruptions resulting from Covid-19.

Of course, just as no voyage is always smooth-sailing, no investment is without risk.

Covid-19 has disrupted the operational and financial performance of M-REITs, particularly for retail and hospitality-focused REITs, resulting in a decline in distributable income, which was in turn reflected through the correction in unit prices over the past year.

As the saying goes, “the rainbow comes after the storm” – despite the unprecedented challenges, M-REITs have demonstrated resilient strength and perseverance, as well as the potential for recovery and growth in the long term. When the storm abates, M-REITs will rise again – and this time, we will reach for greater heights.

Datuk Jeffrey Ng is chairman of the Malaysian REIT Managers Association.

The views expressed here are the writer’s own.

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