Value creation by REIT managers stakeholders


MANY people, organisations and even companies are currently managing their property portfolios themselves, only to be inundated with various costs and challenges – from maintenance to payments of insurance, quit rent and assessments, as well as the need to upkeep and upgrade the properties for long-term growth and appreciation.

In comparison to traditional property investment where owners manage and rent out properties themselves, a unique value proposition that distinguishes Real Estate Investment Trust (REIT) is the presence of a professional management team (REIT Manager) to manage the assets in the best interest of unitholders and execute the strategic direction in accordance with the investment mandate in the Trust Deed of the REIT.

Within the REIT structure, the REIT Manager plays an active and integral role in enhancing property values and long-term investment returns to unitholders through accretive acquisitions, prudent capital management, asset management initiatives (AMI), asset enhancement initiatives (AEI) and property development activities.

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This is especially crucial in an increasingly competitive real estate market during these unprecedentedly challenging times which requires proactive, adaptive, and innovative management strategies to survive, recover and grow sustainably in the long term.

In line with growing awareness of climate change and environmental, social and governance (ESG) principles, REIT Managers consciously embrace ESG initiatives which are increasingly important in mitigating material risks, attracting ESG-conscious investors and opening doors to the future trends of sustainability-linked indices and financing options, while also improving the business operations and reputation of the REIT and potentially enhancing long-term investment returns with an ESG purpose for unitholders.

In general, a REIT Manager grows portfolio and income through organic and inorganic strategies. Organic growth strategy is essentially growing the income of a REIT via AMIs and AEIs of its existing asset portfolio.

Meanwhile, a REIT Manager executes inorganic growth strategy through asset acquisitions and embarking on property development activities such as greenfield or brownfield development.

An important role of REIT Managers is to optimise and uplift the performance of the existing asset portfolio by investing in AEI and/or AMI to maintain, refresh and upgrade the assets. Beyond managing daily operations, REIT Managers also take a proactive stance in adding value to the business by working with property and facilities managers to implement strategies to enhance the competitiveness of property offerings in line with global business megatrends.

The Covid-19 pandemic has changed our lifestyles and the way businesses operate. In the new normal, businesses will continue to adapt and adjust their operations to implement rotational schedules, work from home (WFH), work from anywhere (WFA) and social distancing requirements.

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As these megatrends are taking shape, REIT Managers have to be adaptable and innovative to formulate new strategies to cater to the evolving landscape and emerging demands by realigning, repositioning, or even repurposing assets to unlock their value.

An example of AEI/AMI is Capitaland Malaysia Mall Trust (CMMT)’s RM52mil transformation of the annex block of Sungei Wang Plaza along Jalan Bukit Bintang in 2019 to revamp the tenancy mix of the section of the property, now known as “JUMPA”.

REITs may also acquire assets from their Sponsors’ pipeline assets or via external acquisitions. Prior to any transaction, REIT Managers go through meticulous due diligence taking into account factors including but not limited to synergies with the existing asset portfolio, fair market valuation, opportunity costs, lessee or tenant’s profile, as well as the risk premiums attached.

For example, UOA REIT acquired a pipeline asset – UOA Corporate Tower in Bangsar from its Sponsor, UOA Development Berhad for a purchase consideration of RM700mil in December 2020. Meanwhile, an example of external asset acquisition is Atrium REIT’s purchase of an industrial property in Persiaran Raja Muda, Shah Alam from Permodalan Nasional Bhd, a non-related third party, for a purchase consideration of RM45mil which was completed in February 2021.

With reference to the revised Securities Commission’s (SC) Guidelines on Listed Real Estate Investment Trusts (Revised Guidelines) which came into effect on April 9, 2018, REITs are allowed to undertake property development activities with an investment value not more than 15% of total asset value (TAV). The expanded scope of permissible activities provides REIT Managers with more options to grow the asset portfolio and boost income generation capacity.

An example of property development activity is Axis REIT’s RM211mil built-to-suit distribution centre in Klang for Nestle (M) Bhd’s wholly-owned subsidiary Nestle Products Sdn Bhd, which was completed in January 2018 based on technical specifications mutually agreed by both parties.

Charting a sustainability journey and adhering to ESG goals help to address key material risks and support sustainable long-term growth for REITs while ensuring accountability to stakeholders. In the face of the Covid-19 pandemic, several Malaysian REITs (M-REITs) have extended hundreds of millions in rental relief and assistance programmes to assist their tenants to sustain the continuity of the local business community.

Furthermore, convention centres owned by KLCC Property Holdings Bhd, Sunway REIT, and IGB REIT, as well as hospitals owned by Al-Aqar Healthcare REIT amongst others, provided facilities and human resources to support the Covid-19 National Immunisation Programme serving hundreds of thousands of Malaysians for the country to achieve herd immunity.

REIT Managers also practise prudent financial management in maintaining a healthy balance sheet to meet financial obligations and commitments as well as to have adequate debt headroom to fund potential acquisitions. As such, REIT Managers would consider diversifying sources of funding to achieve an optimal cost of debt, gearing level, and debt-equity ratio, which are crucial for a REIT to support its investment and risk management strategies to deliver stable and sustainable returns to unitholders.

The adoption of ESG principles coupled with increasing demand for ESG investment products has contributed to the growth in sustainable finance. This has also led to more organisations having an integrative approach towards incorporating ESG metrics into their business operations to optimise their capital and risk management strategy.

For example, Sunway REIT has recently collaborated with OCBC Bank (M) Bhd for a proposed sustainability-linked bond issuance under its existing RM10bil medium-term notes (MTN) programme, being the first REIT in Malaysia to venture into the sustainable financing sphere. The programme is attached to a set of clearly defined sustainability performance targets (SPTs) which incentivise the issuer upon achieving the SPTs. The issuance of the sustainability-linked MTN Programme demonstrates M-REIT’s commitment to embrace ESG practices holistically across its value chain.

In the bigger scheme of things, M-REITs contribute positively to the national economy and real estate landscape in providing and managing asset space for tens of thousands of businesses which support hundreds of thousands of jobs, while driving real-estate investments. From a capital market perspective, REITs provide an alternative choice of investment and relatively higher liquidity with transparency in comparison to physical real estate investment.

In 2020, despite the unprecedentedly challenging market conditions, M-REITs collectively distributed more than RM1.5bil in the form of distribution income to unitholders which include corporations, individual and institutional investors. From the income distributed to M-REITs’ individual and institutional unitholders, 10% was paid to the government in the form of Withholding Tax, on top of the corporate income tax paid by corporate unitholders, adding to the government’s coffers over the years.

Property development, AEIs, capital and financial market activities by M-REITs also contribute to many other businesses and industries from construction to the financial sector. All these decisions, actions and strategies contribute positively to the nation’s gross development product, lower unemployment rate, and standard of living.

As the saying goes, “Towers are built with strong foundations shaped by skilled hands”, REIT Managers are instrumental in integrating various elements of success and uniting stakeholders to ensure the continued and sustained performance of REITs.

Datuk Jeffrey Ng is the immediate past chairman of the Malaysian REIT Managers Association and CEO of Sunway REIT Management Sdn Bhd.

The views expressed here are his own.

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