- Local dailies reported that REIT managers are seeking a proposal from the Securities Commission (SC) to allow the acquisition of greenfield assets, according to the Malaysia REIT Managers Association.

- The current legislation only allows local REITs to purchase buildings under construction, including abandoned buildings. Greenfield assets are completely offlimits for the REITs. In most cases, the REITs are backed by sponsors, who are likely property developers and having rights to develop greenfield assets.

- The REIT managers have reportedly put forward a proposal to SC for the greenfield acquisition cost to be capped at 10% of the REIT’s total asset size. This is to mitigate any construction risk or surprises on the downside. Accordingly, this would enable the REITs to attain a more attractive return due to an earlier stage of entry. A cap of 10% has been implemented in Singapore and has proven to work well for them.

- We believe the proposal was prompted by the increasingly challenging landscape in the search for yield-accretive and quality assets, coupled with rising asset values. In turn, this somewhat limits the REITs to go beyond organic growth, despite having defensive characteristics with good fundamentals.

- We are neutral on this development, but it could be a positive given that the REITs would be able to accelerate the injection of potential assets. However, some shareholders may disagree to the proposal given the dilution and sacrificing of shortterm distributions, coupled with time taken to recoup the cost, given that the assets would not be income producing.

- Taking all in, we are maintaining our NEUTRAL stance on the sector underpinned by the lack of constructive yield-accretive acquisitions in the immediate- to near –term, despite a pipeline of assets. Our only sector BUY is CMMT (FV: RM2.15/unit) driven by the potential acquisition of Queensbay Mall by FY14F, which we opine holds the first mover acquisition advantage amongst the retail REITs under our coverage.

- We continue to like Pavilion REIT (HOLD, FV: RM1.65/unit) for its quality assets and sizeable pipeline of assets, with the earliest being Fahrenheit 88 in FY14F. Meanwhile, IGB REIT (HOLD, RM1.38/unit) is poised for organic growth due to the absence of assets for injection (aside from the far-off upcoming Southkey Mall).

- As for Al’-Aqar Healthcare REIT (HOLD, RM1.45/unit), we believe potential acquisitions could materialise within the next one year, supported by completed or nearly-completed hospitals of KPJ Healthcare (HOLD, RM6.47/unit).

Source: AmeSecurities