KUALA LUMPUR: ASIAN real estate investment trusts (REITs), despite having been in existence for only over a decade, have grown substantially, partly due to a boom in the number of REIT initial public offerings in recent years.
REITs are investment vehicles that pool together income-producing real estate assets, such as hotels, office buildings, rental apartments, warehouses, logistics centres and shopping malls. These are a significant asset class that attracts investors who are looking for a higher yielding annuity-style investment at low to moderate risk and a potential hedge against inflation.
The biggest Asian REIT market currently is Japan with an estimated market capitalisation of US$110 billion (RM489 billion), followed closely by Australia, with a US$105 billion market cap. These two REIT markets were the fastest growing in the world over the past five years and have overtaken France and the United Kingdom to be the second- and third-largest global REIT markets, respectively.
In 2014, Asia accounted for US$7 trillion, or about 25 per cent, of the global “investable” real estate market. This is expected to grow significantly to US$17 trillion by 2020, to around 35 per cent.
Last year, the Asian REIT market posted a healthy 15.9 per cent total return, as represented by the S&P Pan Asia REITs Index. Australia and Singapore REITs were the best performers, accounting for 35 of the top 50 performers in the 146-member index.
The top-three performing REITs in Asia currently are Astro Japan Property Group, Dexus Property Group and Lippo Malls Indonesia Retail Trust. Astro Japan Property has a portfolio that features office, retail, residential and hotel assets. Dexus Property has a similar portfolio but with added exposure to industrial properties.
Lippo Malls Retail Trust, the only Indonesian REIT in the market, has a portfolio comprising high-quality retail malls and spaces. There are six Malaysian REITs in the list, with four ranking from eighth and 11th place. Pavilion REIT and IGB REIT are taking the lead with returns of 27.2 and 24.9 per cent, respectively.
Other Malaysian REITS are Sunway REIT, Al-’Aqar Healthcare REIT, KLCC Property Stapled REIT and AXIS REIT.
Meanwhile, analysts expect select REIT players to continue to do well, particularly those with quality assets in the commercial, industrial and healthcare space.
Malaysian REITS vs Foreign REITS
Taking a look back a year ago, REIT markets around the world had done reasonably well, with only the Brexit-troubled nation ended the term in red (See Chart: Total REIT Return Over A Year).
Currently, Asian REIT markets are offering a 4.6 per cent yield, which are below those of French, German and Canadian REIT markets. iFAST Research said valuation-wise, as represented by the price-to-book ratio, Asian REITs are still hovering near the 1.2 level despite taking in some impacts at the end of last year following the United States Federal Reserve’s interest rate hike.
“At this juncture, we could say that Asian REITs have performed relatively well compared to those in other markets for existing investors, but their current valuation and dividend yields may detract investors looking to allocate more funds in the REIT segment amid the currency exchange rate concerns,” it said.
Things To Watch Out For
For investors who are considering to invest in REITs now, there are a few areas to look out for, says iFAST research team.
“Firstly, a rising interest rate environment does not usually bode well for the REIT market. Secondly, the supply-demand dynamics can vary greatly across different countries... therefore, it is crucial for investors to get familiar with the property and real estate market conditions before deciding to invest in the types of REITs they favour. Apart from that, market sentiments on the economic conditions may indirectly contribute to the vacancy rates of properties, especially those associated with commercial and office buildings.
“For example, the weakening of the ringgit over the past two years may be one of the catalysts to boost tourism activities within the nation and this will be positive for REITs that are particularly focused on the hospitality sectors,” the research team told NST Property.
For local investors seeking to invest in offshore REITs, iFast cautions against expectations of a declining ringgit. iFAST Research thinks that stabilising oil prices and Bank Negara Malaysia’s new foreign exchange policy should remain supportive of the ringgit moving forward.
As such, for investors who are considering to invest in offshore REITs, apart from the current ongoing steam in the US economy with President Donald Trump’s new policies, the strengthening of the ringgit is another important area to look out for, it says.In accordance with the Real Effective Exchange Rate provided by Bank of International Settlements as of December 31 2016, the ringgit is undervalued by about 16.1 per cent.
“Potential foreign translation losses might occur should the ringgit normalise. As such, investors might need to receive a potentially higher return from their REIT investments in order to offset these losses,” adds iFAST Research.
REIT Valuation
In assessing valuation, REIT ability to deliver consistent cash distributions is one of the key areas to watch for, other than the appreciation of the underlying assets. Valuation on yields should also be emphasised as the global outlook for yields is on an improving trend on the back of rising-risk-free rates, coupled with reflationary forces from the stabilisation of commodity prices.
iFAST Research expects Malaysian consumer sentiment and spending to recover, but at a slow pace this year, which signals lack of exciting opportunities in the retail REIT segment. On the other side, the office space supply glut will continue to weigh on the performance of office REITs. Those that have quality assets within prime areas such as Pavilion and townships like Sunway should continue to offer resilient earnings and rental income for investors, it says.
“Not long ago, we have witnessed the emerging market bond rout that entailed the surge in US Treasury rates following Trump’s unprecedented victory. The Malaysian market, Malaysian Government Securities (MGS) in particular, suffered just as foreign investors slashed holdings of sovereign emerging market bonds amid an anticipated rise in US risk-free rates. “The turn of events has further compressed the yield spread between the MGS and M-REITs (Malaysia REITs), making the latter appear less attractive at the current level,” it adds.
iFAST Research says as of January 31 the yield spread narrowed down to 0.88 per cent compared with 2.62 per cent a year ago.
“In terms of valuation, the price-to-book ratio of the Malaysian REIT market is also trading at a premium. This may portray that REITs in Malaysia are currently overvalued,” it says. (See Chart: Yield Spread Compression between REITs and MGS).
Aside from the compressed yield spread and valuation trading at a premium, the neutral monetary policy stance may also be unfavourable for the REIT market.
“The possibility of a rate cut by Bank Negara, which could widen the yield spread, is minimal. Malaysia’s third quarter (quarter-on-quarter) figure had also come in stronger than expected and inflation numbers for last year were within market expectations.
“These would taper off the likelihood of monetary easing from the local central bank as economic conditions have started to show signs of recovery. All these have caused local REITs to appear less attractive now.”
As of January 31, the average dividend yields of the top five Malaysia constituents in the S&P Pan Asia REITs Index were about five per cent.
Local REITs may remain relevant to investors looking for a stable stream of income and portfolio diversifier, iFast Research says, but cautions them to be aware of the internal and external headwinds. “In near term, we will be anticipating new guidelines from the Security Commissions aimed at facilitating growth for the M-REIT segment. The new guidelines are expected to allow REITs to invest in a wider range of real estate asset classes and call for a tighter level of corporate governance and audit requirements, which may revamp the local REIT market to be more dynamic and appealing to investors,” it says.
Dos and don’ts
1. Prior to starting an investment in REITs, investors should first outline their investment objectives and determine the purpose of the investment.
2. Investment horizon and sufficient emergency funds are among the key factors to watch out for so that one will not be liable to premature liquidation of his or her investment at unfavourable times.
3.While global economic growth is expected to accelerate this year, it is important to note that volatilities are here to stay.
4. Although REITs are investment vehicles that tend to provide a stable source of income, investors should always keep an eye on their investments from time to time and follow the news closely in order to identify market developments that could have direct or spill-over effect on their portfolio.
5.Investors are recommended to have a diversified portfolio, instead of solely investing in REITs.
6.Investors should not be overly focused on the yield offered by a particular REIT. A stable source of dividend income and decent cash flows are equally important. While looking at historical data and information, investors should be mindful that past records are no guarantee of future results and, therefore, should not be over-reliant on any single source of information.