Property - M-REITs
Maintain overweight: Regional REITs, such as S-REITs and J-REITs, have always been trading at premium when compared to M-REITs, in terms of their yields as well as P/NAV. While factors such as asset size and liquidity play an important role in determining valuations, the tax regime and REIT guidelines imposed by governments and authorities in individual countries also affect the attractiveness of all REITs.

The reduction of withholding tax is always included in the proposal of M-REITs for Malaysian government consideration during the annual Budget. Last year, the Real Property Gains Tax (RPGT) was reimposed, which is mainly intended to curb speculative buying in real properties. However, no announcement was made for the REIT sector. For the upcoming Budget 2011, which will be tabled on Oct 15, we are hopeful that withholding tax for M-REITs could be reduced/removed from the current level of 10% versus 0% in Singapore and Hong Kong. Note that the withholding tax rate has not been adjusted since 2008.

Apart from the issue on tax, the Malaysia REIT Managers Association (MRMA), spearheaded by Axis REIT Manager, would also like to propose to regulators a further relaxation on REIT guidelines: (i) To allow REITs with assets under management (AUM) under RM2 billion to have multiple placements to grow their market cap. However, rules can be enforced if AUM exceeds RM2 billion; and ii) Faster processing for rights issues for REITs taking a cue from Singapore. This allows M-REITs to expand their asset size at a faster pace with a smoother process.

Since the listing of the two retail/commercial based REITs - Sunway REIT and CapitaMalls Malaysia Trust (CMMT) - the performance of these REITs is generally in line with the performance of other M-REITs. Given the size of both REITs, the resulting higher liquidity is undoubtedly more attractive to institutional investors. This largely explains the higher valuations that both Sunway REIT and CMMT attain at a prospective yield of about 7%, against the M-REIT average yield of 8%.

We continue with our positive view on M-REITs due to: (i) The continuous economic growth, hence, rising private consumption, industrial and economic activities; (ii) Rising young population profile, which is the key driver of consumption; (iii) Higher investibility of M-REITs following the listing of the two sizeable REITs - Sunway REIT and CMMT; and (iv) REITs provide a good hedge against rising inflation. - RHB Research Institute, Sept 14


This article appeared in The Edge Financial Daily, September 15, 2010.