14 September 2010 Page 1 of 5 A comprehensive range of market research reports by award-winning economis ts and analysts are exclusively available for download from w w w .rhb inv est.comLoong Kok W en, CFA (603) 92802237 [email protected]♦MREIT vs regional REIT. Regional REITs, such as SREITs and JREITs, have always been trading at premium when compared to MREITs, 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 government and authorities in individual countries also affect the attractivene ss of all REITs. ♦Wish list for the upcoming Budget 2011. The reduction of withholding tax is always included in the proposal of MREITs for Malaysia’s government consideration during the annual Budget. Last year, RPGT (Real Property Gain Tax) was re- imposed, 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 15 th Oct 2010, we are hopeful that withholding tax for MREITs could be reduced/removed from the current level of10% vs 0% in Singapore and Hong Kong. Note that, the withholding tax rate has not been adjusted since 2008. ♦Other regulatory issues. 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 asset under management (AUM) under RM2bn to have multiple placements to grow their market cap. However, rules can be enforced if AUM exceeds RM2bn; and ii) Faster process for rights issue exercise for REITs taking a cue from Singapore. This allows MREITs to expand their asset size at a faster pace with smoother process. ♦Performance of the new retail REITs. 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 MREITs. 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 ofabout 7%, versus MREIT average yield of 8%. ♦Maintain Overweight on the M-REIT sector. We continue with our positive view on M-REITs due to: (1) The continuous economic growth, and hence rising private consumption, industrial and economic activities; (2) Rising young population profile, which is the key driver of consumption; (3) Higher investibility of M-REITs following the listing of the two sizeable REITs – Sunway REIT and CMMT; and (4) REITs provide a good hedge against rising inflation.Table 1 : REIT Sector Valuations Company FYE Price FV EPS growth (%) PER (x) DPU growth (%) GDY (%) Gearing Rec (RM/s) (RM/s) FY10 FY11 FY10 FY11 FY10 FY11 FY10 FY11 (x) Axis REIT Dec 2.12 2.67 5.6 12.3 12.7 11.3 5.5 12.3 7.9 8.8 0.34 OP Quill Capita Dec 1.00 1.23 7.3 4.7 11.2 10.7 6.8 4.7 8.2 8.6 0.35 OP Sector Avg 6.4 8.5 12.0 11.0 8.0 8.7 * price at 13 Sept 10 Corporate Highlights Sector Update Property - M-REITs The Wish List For The 2011 Budget M a l a s i a M A R K E T D A T E L I N E P P 7 7 6 7 / 0 9 / 2 0 1 0 ( 0 2 5 3 5 4 ) Recom : Overweight (Maintained)14 September 2010 RHB Research Institute Sdn Bhd A member of the RHB Banking Group Company No: 233327 -M
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8/8/2019 Property Sector Update - M-REITs : The Wish List For The 2011 Budget - 14/09/2010
♦ MREIT vs regional REIT. Regional REITs, such as SREITs and JREITs, havealways been trading at premium when compared to MREITs, in terms of theiryields 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 guidelinesimposed by government and authorities in individual countries also affect theattractiveness of all REITs.
♦ Wish list for the upcoming Budget 2011. The reduction of withholding tax isalways included in the proposal of MREITs for Malaysia’s government considerationduring the annual Budget. Last year, RPGT (Real Property Gain Tax) was re-imposed, which is mainly intended to curb speculative buying in real properties.However, no announcement was made for the REIT sector. For the upcomingBudget 2011, which will be tabled on 15 th Oct 2010, we are hopeful thatwithholding tax for MREITs could be reduced/removed from the current level of 10% vs 0% in Singapore and Hong Kong. Note that, the withholding tax rate hasnot been adjusted since 2008.
♦ Other regulatory issues. Apart from the issue on tax, the Malaysia REIT
Managers Association (MRMA), spearheaded by Axis REIT Manager, would also liketo propose to regulators a further relaxation on REIT guidelines: i) To allow REITswith asset under management (AUM) under RM2bn to have multiple placements togrow their market cap. However, rules can be enforced if AUM exceeds RM2bn;and ii) Faster process for rights issue exercise for REITs taking a cue fromSingapore. This allows MREITs to expand their asset size at a faster pace withsmoother process.
♦ Performance of the new retail REITs. Since the listing of the tworetail/commercial based REITs – Sunway REIT and CapitaMalls Malaysia Trust(CMMT), the performance of these REITs is generally in line with the performanceof other MREITs. Given the size of both REITs, the resulting higher liquidity isundoubtedly more attractive to institutional investors. This largely explains thehigher valuations that both Sunway REIT and CMMT attain at a prospective yield of
about 7%, versus MREIT average yield of 8%.♦ Maintain Overweight on the M-REIT sector. We continue with our positive
view on M-REITs due to: (1) The continuous economic growth, and hence risingprivate consumption, industrial and economic activities; (2) Rising youngpopulation profile, which is the key driver of consumption; (3) Higher investibilityof M-REITs following the listing of the two sizeable REITs – Sunway REIT andCMMT; and (4) REITs provide a good hedge against rising inflation.
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The Wish List
♦ MREIT vs regional REIT. Regional REITs, such as SREITs and JREITs, have always been trading at premiumwhen compared to MREITs, in terms of yields as well as P/NAV. On average, SREITs and JREITs’ yield of around7% is a tad lower than MREITs yield of around 8%. Hence, REITs are more attractive in Singapore and Japan.While factors such as asset size and liquidity play an important role in determining valuations, tax regime andREIT guidelines imposed by government and authorities in different countries also affect the attractiveness and
investibility of REITs.
Table 2: Regional comparison of REITs in terms of asset size, P/ NAV and historical dividend yield
Price (LC) Mkt cap (US$ m) Total Asset (US$ m) P/ NAV Div Yield (%)
Japan
Japan Real Estate Investment Corp 749,000 4,356.3 7,577.3 1.1 4.7
Japan Retail Fund Investment Corp 111,400 2,235.9 6,996.8 0.7 6.9
Japan Prime Realty Investment Corp 179,800 1,528.4 4,260.4 0.7 7.3
Orix JREIT 390,000 1,166.7 3,420.8 0.7 7.5
Japan Logistics Fund Inc 643,000 1,126.1 1,448.8 1.1 4.9
Nippon Accommodations Fund Inc 482,500 895.9 2,216.5 0.9 6.1
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♦ Risks and concerns. The risks include: (1) Non-renewal of tenancy after expiry; (2) Unfavourable economicconditions that will cause devaluation of properties; and (3) Substantial interest rate hikes that will affect totalborrowing costs.
♦ Forecasts . Maintained. We value Axis REIT and Quill Capita based on yield benchmark of 7%, pre-crisis level,and after taking into account the relative market capitalisation and liquidity.
♦ Maintain Overweight on the M-REIT sector. We continue with our positive view on M-REITs due to: (1) Thecontinuous economic growth, and hence rising private consumption, industrial and economic activities; (2) Risingyoung population profile, which is the key driver of consumption; (3) Higher investibility of M-REITs following thelisting of the two sizeable REITs – Sunway REIT and CMMT; and (4) REITs provide a good hedge against risinginflation.
♦ After hitting a high of RM2.07 in Nov 2009, and as
it failed to sustain at above the resistance level of RM2.06, AXReit fell on heavy profit-takingactivities.
♦ However, with the help of a support near the UTL 1at RM1.90, the stock found its footing and regainedits upward momentum.
♦ It started off with a slower uptrend (UTL2) andregained its buying support, before penetrating theRM2.06 level in Jul 2010.
♦ Following a decent pullback in Aug, the stockrelaunched a rally in recent sessions to RM2.17before closing at RM2.12 yesterday.
♦ Given the slow turnover in recent weeks, the stockcould ease on profit-taking pressure in the nearterm, due to the muted technical readings, in ourview.
♦ However, we remain confident that the key supportat RM2.06 will buffer selling pressure, and upwardmomentum should resume nearer to RM2.06.
♦ Key immediate resistance is at RM2.17, followed bythe RM2.30 all-time high level reached in Aug2007.
8/8/2019 Property Sector Update - M-REITs : The Wish List For The 2011 Budget - 14/09/2010
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