Sunway REIT sets new industry benchmark

PETALING JAYA: Sunway REIT, which made its debut on Bursa Malaysia on July 8, has set a new industry benchmark in the local real estate investment trust (REIT) market (M-REIT) by adopting best practices in its business model, market disclosure and corporate governance practices.

Sunway REIT is the largest in the country in terms of asset value at RM3.4bil. It has a total gross floor area of 8.1 million sq ft and a market capitalisation of RM2.4bil, which represents about 28% of the total market capitalisation of M-REIT.

The trust’s eight assets comprise Sunway Pyramid Shopping Mall, Sunway Carnival Shopping Mall, SunCity Ipoh Hypermarket, Sunway Resort Hotel & Spa, Pyramid Tower Hotel, Sunway Hotel Seberang Jaya, Menara Sunway and Sunway Tower.

According to Sunway REIT Management Sdn Bhd chief executive officer Datuk Jeffrey Ng, with three hotels in its portfolio, the management company has signed hotel master lease agreements with Sunway City Bhd’s subsidiaries, Sunway Resort Hotel Sdn Bhd and Sunway Hotel Seberang Jaya Sdn Bhd, to mitigate fluctuations in the hotel’s cyclical business.

“The rental-guarantee floor will ensure the minimum rental for Sunway REIT’s 1,190 hotel rooms. Meanwhile, there is no limit as to how high the rental can go when the hotel market turns for the better, which will on the overall benefit the REIT’s income streams,” Ng told StarBiz.

He said Sunway REIT was also the first local REIT to subject its IPO offer to a market price mechanism as well as allowed its asset valuation to be determined by the REIT’s prevailing unit price.

Before the international roadshow for Sunway REIT commenced last month, the REIT manager signed up reputable cornerstone investors including the Government Investment Corp of Singapore, The Employees Provident Fund, Permodalan Nasional Bhd, and Great Eastern Life Assurance (Malaysia) Sdn Bhd, which collectively have confirmed allocation of about 14% stake in the REIT.

It also adopted an over allotment or green-shoe option that came up to 87 million units that will function as a stabilisation mechanism during the one month “stabilising” period until Aug 8.

“We have also proposed for up to 50% of the management fees to be paid in Sunway REIT units and this practice shows that the management company is confident in the REIT’s performance. This should translate to about 10 million units a year,” Ng said.

To attract more global investors, Sunway REIT is working towards being included as an indexed REIT by the Brussels-based European Public Real Estate Association (Epra) and the National Assocation of Real Estate Investment Trusts (Nareit) of the United States.

According to Ng, institutional REIT investors including pension and insurance funds, track these global standard index and use it as a benchmark to guide their investment decisions.

“With RM1.56bil worth of free-float units, big global investors will be attracted to invest in Sunway REIT because of its liquidity. Once accepted as the benchmark indexed REIT for Malaysia, Sunway REIT will be in the global investors’ radar screen,” Ng pointed out.

Based on the institutional offer price of 90 sen a unit, Sunway REIT offers a yield of about 7.5% for institutional investors for the financial year ending June 30, 2011.

Retail investors can look forward to a distribution yield of 7.66%, which is higher than the 6.9% yield disclosed in the prospectus.

The IPO raised RM1.56bil (including the over allotment of 87 million units at RM78mil), of which 44% or RM680mil were subscribed by foreign institutional funds.

Ng said although Sunway REIT had a diversified asset portfolio, some 70% of its asset value and 67% of revenue would be from retail assets, which showed that Sunway REIT was a retail-focused REIT.

The three retail assets have total net lettable area of 2.4 million sq ft and asset value of RM2.4mil, making it the largest retail-focused REIT locally.

“Both the retail and institutional investors are looking at broader and longer-term investment horizon. Being a defensive REIT, unit-holders can look forward to a longer-term growth catalyst as well as low risk and stable yields.

As long as its cashflow remains strong, the dividend payout will be 100% of total net distribution income,” Ng added.

By ANGIE NG, The Star

Why REITs should be the choice of investment

KUALA LUMPUR: Real estate investment trusts (REITs) offer many advantages to investors who are keen to invest in the property market.

Axis REIT Managers Bhd chief executive officer Stewart LaBrooy said what was important now to REIT players was to educate them on the benefits on investing in REITs.

“We need to educate them as most of them are not really aware of the advantages, such as having a higher yield compared with some other investments,” he said yesterday at the Investor Insights into Malaysian REITs in 2010.

As a result of the lack of awareness on REITs, he said, the participation from Malaysians in REITs was still small compared with other countries.

“We have 13 REITs now listed on Bursa Malaysia that cover all types of industries. With a high dividend yield of about 7% annually, low entry cost and support with higher corporate governance, REITs should be the choice of investment,” he said, adding that the size of assets of Malaysian REITs was now about RM16bil.

In REITs, a pool of money from investors is invested in properties such as office buildings or shopping malls and the investment is managed by REIT managers.

LaBrooy said another advantage of investing in REITs was the tax efficiency where investors were taxed only once.

“Apart from that, it is easy to invest in REITs as you can buy it today and sell the unit tomorrow, similar to equity stocks. Plus, REITs are a hedge against inflation,” he said, adding that they were low risks and a passive type of investment.

He said the way REITs did its business was to make sure about 90% to 100% of its retained earnings before tax were given back to investors.

“Last year, despite facing a global economic crisis, Malaysian REITs were still giving back about 70% to 80% of its retain earnings to investors,” he said.

Meanwhile, touching on the outlook of residential and office market in Malaysia, CB Richard Ellis (M) Sdn Bhd executive chairman Christopher Boyd said overall, both markets were still stable.

“For the residential market, we are still in the safe net as in Malaysia, developers are still using the method of sell-first-before-build. If you build first then sell like what is done by some other countries, then you will risk yourself of not getting buyers if suddenly problems arise, such as the economic downturn, ” he said.

By EDY SARIF, The Star

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! 

林园- 股神

How to start a business?

Start a business is having create something new. The would-be entrepreneur or founder has to convince everyone of what a great idea it is. The emphasis is on the idea and its possibilities for the future. There are 4 fundamental areas to look at:

1 The business plan

Business plans come in different formats, but any solid plan should include the following:

• An executive summary outlining goals and objectives
• A brief account of your company’s beginnings
• Your company’s business goals, with a time frame for milestones
• The service or product you plan to offer
• The market potential for your service or product
• A marketing strategy
• A 3-5 year financial projections
• An exit strategy

Once you’ve created a basic plan, you’ll want to make sure it offers realistic, solid projections about the course of your business success.

2 Marketing

Identify and characterise your niche customers and target marketing directly to their needs. Target marketing messages in appropriate sales channels to hit the nerve of important customer segments.

3 People

Usually, small businesses carry out the various activities by themselves but if you are hiring people, decide what staffing needs you have. Training plays a very important role in the development of people.

4 Financial

Pay attention and learn to manage your working capital to ensure that you always have sufficient positive cash flow to support short-term debts and operational expenses.

Investing in REIT - part 2

When we invest in REITs we are looking for an instrument that provides high, consistent and growing dividend income. The REITs that we invested in must be able to generate sustainable and growing rental incomes from their rental properties business. Without a good rental properties business, the REITs could not distribute sustainable dividends to its shareholders.

Other than dividends income, the fluctuation in REITs share prices enables us to make capital gain. A well-managed and growing rental properties business, for REIT, will inevitably lead to higher dividends payouts and therefore higher share prices. More on reasons to invest in REITs.

The key to invest in REITs successfully is to know the sustainability and potential of their rental income, the management integrity and their intention and competency to improve and grow their rental properties.

A good REIT has

• Sustainable and improving rental incomes
• Good management with integrity in managing the Reit
• Good management with intention and competency to improve and grow the properties in the Reit

For sustainable rental income:

• The properties in the Reits must be well-located, well-managed and well-maintained
• The Reits must have assurance of future income without relying on mere few big tenants
  

For growing rental income:

• Location, location and location of the properties in the Reit
• The management is actively seeking to increase properties held in the Reits
• The management is actively seeking to increase value of the properties in the Reits

Translate the criteria into checklist:

Questions to answer when invest in REITs:
1. Does the Reit have a broad base tenants in diversified industries?
2. Does the Reit have quality tenants with rental contracts more than one year? An average 2.5 to 3 years contract length is good.
3. How is the conditions and the locations of the properties in the REIT?
4. Does the original issuer still hold at least 70% of the REIT? This question is the main reason why management would do good to the REIT. The bigger their stakes in REIT the bigger the incentive for the management to manage the Reit well.

REITs we must avoid are those with properties that dumped by the issuer. The issuer would hold very little stake in the REIT after disposing their unwanted properties into REIT for a good profit and to earn management fees, trustee fees, etc. from the REIT.

Investing in REIT shares

What is REIT?
Real Estate Investment Trust (REIT) is a financial structure created to enable members of the public who are keen to invest in property to invest without the need to take a 'solo' risk. To try to 'gobble up' a good acquisition by themselves may prove too big and may cause indigestion.

Many investors do not have a huge appetite for risk and would be willing to pass up a good property deal even if it is on their lap. But they would probably say ‘yes’ to the investment if a few friends were to be willing to participate in it. Herein lies one of the fundamental reasons for the creation of REIT.

Often, many of the larger properties are occupied by big companies and multi-nationals with internationally established business. These companies, many of which are the Fortune 500 companies of the world, occupy huge volumes of space which would be beyond the ability of the ordinary man to own and be a landlord.

The commitment of these companies to their tenancy agreements are as good as bank guarantees. They generally do not default on their rental commitments – which is what any property investor would like to see. But again, because of the size of the real estate, only if there were to be a grouping of investors, would one have any chance of owning such a big asset.

Correspondingly, if you were to buy smaller assets, it is common that your tenants will be smaller firms and start-ups whose rating would not be Triple AAA and are more likely to default on their rent, not to mention, even their business!

When the grouping of investors is big enough, it makes economic sense to engage professional services to manage and enhance the value of the assets. This enables you to free up your time and yet put management of the real estate in the hands of capable professionals – whose job, among other responsibilities, is to further improve the yields and value of your real estate. This means ownership without having to lift a finger!

Life is a roller coaster of uncertainties. Even when we are most confident of the future, calamities and unfortunate events can occur and which may require us to use cash urgently.

REIT shares traded on the Bursa Malaysia allow you to sell the property shares immediately and obtain cash within three days. You only need to sell the amount of shares for which the cash you require unlike owning a building yourself where you cannot sell a part of the building. Therefore REIT shares accord you financial flexibility for your immediate needs.

The injection of quality assets such as Menara Axis into Axis-REIT has contributed to the trust's success

One of the differences between the REIT of today and that of yesteryear is in the area of taxation. Previously, property trusts did not enjoy any tax preference and were taxed like usual corporations at 28% income tax. Today, however, the REITs are enjoying a lower tax bracket of only 15%.

REITS in Malaysia are generally returning to shareholders dividend yield of between 6.5% and 7.5%*. In the short-term this is likely to be the scenario; however, in the long- term, a well-run REIT should be able to pay out dividends in excess of 10% per annum, due to, among other factors, rent increases as the market improves, as well as extraordinary gains due to capital gains on asset disposal.

The various REITs on Bursa Malaysia have their core investments in differing market segments of the property market. Axis-REIT is focused on industrials offering principally office and warehouse space used by trading companies such as Fuji Photo Film, Fuji Xerox, Minolta, Ricoh, Electrolux, Philips and DHL.

The YTL–REIT is focused predominantly on the retail trade as can be seen from its investment into Starhill as well as Lot 10 Shopping Complex.

The UOA and Tower REIT have their attention focused on office space. The latest listed-REIT, KPJ Healthcare REIT, is focused on investments in hospital buildings.

The decision on which segment a REIT wishes to focus their "energy" on, depends on the core competency of the promoters – i.e. the promoters believe in focusing on the areas of the market they know best. All these segments have their advantages and it is very much up to the investing public to decide which market they have more faith in.

The other major difference in today’s REIT is that they are mainly promoted by developers who own tenanted properties, rather than financial institutions as in the REITs of yesteryear.

I am sure almost everyone will agree that bankers under¬stand ‘finance’ best and are unlikely to be the best managers or promoters of real estate, which is best left to those in the specialised field of property development and investment.

Therefore, you have today the birth of developer-promoted REITs such as Axis, YTL, UOA and Tower REIT.

The management of REITs in Malaysia is under the strict purview of the Securities Commission (SC) which has imposed many rules and regulations pertaining to how the REIT is to be managed, including the prior approval of the SC for the appointment of any particular director of the management company. This ensures that the REIT is in capable hands.

The YTL–REIT is focused predominantly on the retail trade as can be seen from its investment into Starhill as well as Lot 10 Shopping Complex.

Besides this, shareholders and directors who are injecting any of their assets into the REIT do not have any voting rights when it comes to deciding on acquisitions.

Therefore it is the "minority" shareholders who to a certain extent decide on whether a proposed acquisition is good or not for the REIT.

The establishment of a strong and capable management team ensures that the REIT is well managed and that tenants’ issues are well addressed. By managing buildings and attending to matters pro-actively, REIT managers are able to differentiate themselves from the ‘one-off’ property owner who manages one or two buildings on an ‘ad-hoc’ trial-and-error basis.

Professional management ensures that tenants enjoy a superior and hassle-free work environment. This helps to ensure that tenants are long-term and generally do not mind paying a little bit more for quality service, to commensurate with the tenant’s image. It is this pro-activeness that ensures that occupancy is always kept high – rain or shine!

In summary, investment in REIT is all about investing in property with the following features:

1.Pooling resources to invest in quality buildings.

2.Pooling resources to invest in quality Fortune 500 tenants.

3.Economies of scale allow for professional management which know how best to enhance the value of the property.

4.Liquidity – as your shares can easily be disposed off overnight in times of urgency.

5.Your investment enjoys a lower tax bracket.

6.Yields paid to unit holders can potentially be higher than if you were to invest individually.

*Axis REIT, however, for the year ended 31.12.2006, paid an annual dividend of 10.36% p.a. to unit holders.

By By Stephen Tew, MIEA past president on Nov 27, 2007