Hektar REIT

Hektar REIT is one of the higher yielding REITs on Bursa Malaysia.

Basically Hektar is a pure shopping centre play and intends to stay that way. Currently the funds owns 3 shopping centres: 

Name	NLA (sq ft)	Valuation (RM’million)	Location
Subang Parade	473,611	311.4m	Subang, Selangor
Mahkota Parade	466,527	252m	Melaka
Wetex Parade	173,725	130m	Muar, Johor

In the case of Subang Parade, there are a few lots which are not owned by Hektar but we understsand that Hektar is looking to acquire those lots.

Walking into Subang Parade, you get the sense that it is customer-friendly, well maintained, has a good variety of shops and good access.

This transformation underscores the capabilities of Hektar Asset Management to ADD VALUE to its shopping centres. 

Hektar Asset Management Sdn Bhd , Manager of Hektar REIT, shares with us Hektar’s Value Creation Model which we summarize as follows:

1. Tenant Re-mixing   – By owning an entire shopping centre or a large part of a centre, a shopping centre owner is in a position to decide what type of tenants should be in the centre to best serve the needs of the customer.

In the case of Hektar, tenancies are continually being reviewed (in fact in Hektar centres, most tenancies are only given up to 3 years). Since acquiring Subang parade, Hektar has introduced a number of key tenants such as Celebrity Fitness, Orlando, Voir, SenQ, Kenny Rogers Roasters, Coffee Bean and Starbucks. This has no doubt made the centre more credible and “happening”. Subang Parade is now a Lifestyle plus Convenience value proposition.

2. Tenant Relocation   – For example in Subang Parade, Hektar closed the Food Court, relocated Toys R Us to the old Food Court and relocated HSL Electronics to the old Toys R Us lot. By doing so, the shopping centre traffic circulation was improved between the anchor tenants and HSL was able to build a large “Circuit City” concept store.

3. Asset Enhancement   – Increasing Net Lettable Area by capital improvements, reconfiguring low-yielding zones into higher yielding lots (eg re-configuring a low rental space in Mahkota Parade and converting it into a new zone with specialty shops which gives higher rental).

4. Refurbishment   – Notice the fancy floor tiles, nicer toilets and improved amenities in Subang Parade? All this makes the shopper feel good and want to come back.

Aligning the Interests of Tenants with Shopping Centre owner….

Hektar’s rental model includes a Base and Turnover Rent. Typically tenants pay a base rental and also an amount based on their Sales Turnover. This motivates centre management to “promote sales” for their tenants – the more the tenant gets, the more rental the owner gets.

Pure Retail Play…

Hektar focuses on regional and neighbourhoold shopping centres in Malaysia. Going forward its acquition strategy is as follows:
1. Acquire turnaround shopping centres and add value to them
2. Acquire stabilized shopping centres which are yield accretive to its portfolio

Shopping centres which are well-positioned are highly resilient in any economic condition.

Research in developed countries have shown that high quality Regional and Neighbourhood Shopping Centres typically outperform other property asset classes such as Office and Industrial properties during economic downturns. Such centres also offer exposure to economic growth. Where consumer spending power is improving, it generally translates into higher retail sales and centres which dominate their catchment areas stand most to benefit.

Based on Hektar’s research, there is a huge retail opportunity in Malaysia especially outside KL, Selangor and Penang. KL is a well-supplied market with NLA (Net Lettable Area) per capita of around 14 sq ft.

Comparatively, Johor is at 3.6 sq ft, Malacca is 3.4 sq ft, Perak is 2.1 sq feet, Sarawak is 1.1 sq ft  while Terengganu is only 0.5 sq ft.

Indeed Hektar is serious in its research. It analyses traffic in its shopping centres and undertakes consumer research periodically, analysing its catchment area, shopper preferences, feedback and so on.
  More Equity would be Nice…

Current net borrowing position of RM283 million works out to be 70% of its total equity of RM402 million (as at 31-Dec-08). Personally I would like to see gearing at a lower level. Even so, Hektar should have no shortage of options in terms of buying shopping centres with part equity-swap and so on.

Duplication… the Westfield way
Hektar models itself partly on the highly successful Westfield Group of Australia. Westfield is the largest REIT in the world and is a pure retail play. CapitaMall Trust, the largest REIT in Singapore is also a pure retail play, while Link REIT of Hong Kong is also largely retail.

This makes Hektar unique in Malaysia. Looking at other successful centres – Mid Valley Megamall, 1 Utama and Sunway Pyramid – these are great centres but the owners have not been able to duplicate their model across multiple locations.

Hektar has the potential to “make it big” in the next 10 years. There will be a time when the market is more conducive to capital raising and Hektar should be able to access the much-needed firepower to grow its asset base. If Subang Parade is an indication to go by, then we have some exciting things to look forward to!