Malaysian real estate investment trusts (M-REITs) have seen a boost with the recent overnight policy rate (OPR) cut, and also due to the proposed measures for M-REITs to diversify their investment measures.
On Wednesday, property stocks like M-REITs saw a brief hike, but remained muted on Thursday.
M-REITs have become more positive, with Hong Leong Investment Bank Research (HLIB Research) upgrading its rating on the sector to “overweight”, with the average M-REIT yield at 6.2%.
REITs will also be reaping the benefits of the lower interest rates, said Affin Hwang Capital.
The lower interest rates could lead to lower interest payments by REITs which typically gear up to buy their assets. Furthermore, the rates cut also mean more savings and as a result larger disposable incomes for consumers, so they could spend more in retail malls, which is a key asset base of a number of M-REITS.
However, as majority of the M-REITs’ borrowings are in fixed-rate loans, as pointed out by HLIB Research, interest savings is unlikely to be significant.
On the other hand, CIMB Research said that the OPR cut could see “consumers pocketing an extra RM2.1bil a year due to lower interest payments. Nonetheless, we believe that there will not be a spike in consumer spending in the near term, given the uncertain global economic backdrop.”
As such, CIMB Research kept its “neutral” stance on the sector. Malaysia’s REIT market had a total market capitalisation of RM41.07bil as at June 30, 2016, accounting for 17 REITs, including four Islamic REITs.
Another factor that may spurs M-REITs was the proposed guidelines by the Securities Commission (SC) to enable M-REITs to embark on property redevelopment. The consultation paper details 17 proposals “to facilitate growth of the maturing M-REITs market”.
The proposal recommends that M-REITs be allowed to invest in a wider range of asset classes, one of which is to allow them to acquire vacant land and undertake property development.
Currently, acquisitions of properties under construction can only make up of a maximum of 10% 0f the total asset value of a REIT in Malaysia. This is because REITs were not meant to carry construction risks, as their investors are typically yield seekers.
However, with the new proposal, M-REITs are allowed a 15% cap on the total asset value for property development, acquisition of vacant land, as well as property under construction.
This move will enable M-REITs to create more value for their investors, said SC.
Currently, M-REITs are required to sell the old and outdated properties back to their sponsors for redevelopment, and then repurchase these properties later. However, the new proposed changes will allow these REITs to take on the redevelopment of these old properties, which will enable them to improve the property yield for the benefit of their investors.
“Similarly, allowing M-REITs to acquire vacant land for purposes of developing new properties will enable them to grow their portfolio of income-generating real estate,” the SC said in the consultation paper.
The caveat to this change is, the M-REITs must continue to hold the completed property for at least two years from the date of completion, to ensure that the development activities were conducted purely to enhance its income-generating capacity.
Other than redevelopment, SC also proposed a fixed leverage limit of 50% for M-REITs. Though M-REITs are already subjected to a 50% limit on their debts currently, it can be increased if the unit holders give the approval via an ordinary resolution.
“With the current flexibility, there is a risk that an M-REIT may over-leverage in pursuit of rapid growth,” the SC said.
By setting a fixed leverage limit, this risk can be better mitigated to ensure sustainable growth.
The consultation paper released yesterday will receive industry feedback by September 13, 2016, following which, the proposals will come into effect.
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