BY Zoe Phoon
A real estate investment trust (REIT) is a company that owns or finances income-generating real estate. The latter includes shopping malls, industrial facilities, office buildings, hospitals, hotels, plantations and infrastructure.
The following Q&A with Leong Kit May, CEO/executive director, Axis REIT Managers Bhd, provides insights into what the company does and REITs as a good investment choice. She is also vice chairman of the Malaysian REIT Managers Association.
Q: Axis-REIT is Malaysia and the world’s first and largest Islamic business space and industrial REIT. What is Axis-REIT’s future?
A: We expect our industrial portfolio to continue to perform very well. The segment has benefited from rising demand for industrial and warehousing space, and continues to command good rental yields. Our growth strategy continues to focus on the industrial sector and our strength in the development of industrial properties.
We see a demand in logistics and the e-commerce sectors in Malaysia as the country is an excellent choice for being the hub for Southeast Asia due to the excellent infrastructure including ports and skilled manpower, as well as support from government bodies like the Malaysian Investment Development Authority (MIDA) which is promoting the sector worldwide.
Q: Tell us more about your growth strategy.
A: Axis-REIT is committed to delivering long-term sustainable distribution and capital stability through its six principles of management. These are prudent capital and risk management, yield-accretive asset purchases, excellent investor relations, maintaining the highest levels of corporate governance, proactive asset and tenant management, and development of human capital.
Q: Some analysts say when you’re buying REITs, you’re buying not only the assets but also the management team. Please comment.
A: The management team is instrumental in driving the REIT success. To be successful, the management team needs to formulate and implement prudent and effective strategies and deliver the best results to investors while exercising good corporate governance which helps in establishing investor confidence.
Q: How would you describe Axis-REIT’s returns?
A: A REIT’s total return includes both a cash dividend return every quarter as well as a capital gain if the REIT is well run and successful. Axis-REIT continues to deliver strong returns to investors. Since its listing in 2005, Axis-REIT has continued to deliver a total return of 314% total return to its investors.
Q: How do they compare with other REITs’ returns, say retail REITs?
A: Malaysian REITs are a defensive and resilient asset class which appeals to investors with cash income distribution and capital growth. REITs in general have medium long average leases in place providing investors with a certainty of returns.
Q: In 2016, Axis-REIT entered into a build-and-lease agreement for the development of the Nestle Distribution Centre. You said in the 2016 annual report that it’s the Fund’s maiden development project. Do you see the Fund also becoming a developer in the years ahead?
A: The initiative to undertake development up to 15% of the REIT’s total assets is not something new and in fact is on the wish list of the Malaysian REIT sector for the past few years. The development of greenfield properties has long been undertaken by our peer REITs in Singapore, Hong Kong and Australia and has proven to work well for them.
Axis-REIT has been around for slightly more than 12 years, and has been able to demonstrate to the market its ability to manage assets well. Over the last decade, we have been involved in extensive makeovers of Axis-REIT’s properties which have improved the value and investment returns of these properties.
This demonstrates the management’s ability to astutely manage such makeover projects which is crucial when it comes to managing greenfield development.
The ability to develop greenfield property would enable a REIT to attain more attractive returns due to an earlier stage of entry. In addition, this will enable the REIT to accelerate the injection of potential assets.
Q: What should individual investors look for when investing in a REIT?
A: Investors should look at the REIT track record and the management’s capability to deliver good results. The outlook for the properties which the REIT invested in is important as this affects the income generating ability of the REIT.
Q: What are the benefits of parking money in REITs?
A: A REIT provides the property investor with an opportunity to own property of a very high standard through a securitised structure where one can own a part of the REIT’s portfolio or dispose of it in an instant to realise profit.
Here are reasons why REITs are a good investment choice:
- Professionally run and managed
A REIT is run by a professional management company (the REIT Manager) which is licensed by the Securities Commission under the Capital Market Services Act. Strict compliance to regulations of the Securities Commission and Bursa Securities is mandatory.
The REIT Manager is responsible for asset maintenance, and has to ensure that property vacancies are kept at a minimum; rent collection; dividend payments; prudent capital management of the Trust; and to take on asset enhancements when needed.
Most importantly, the REIT Manager is there to ensure that the tenants are happy and their needs are being attended to on a daily basis; this in fact is a big plus point for all property investors. It eliminates business risk for the investor.
So, in summary, investing in a REIT will be your answer to owning real estate without the hassle of attending to your tenants’ demands or managing the property. Just let the professional REIT manager manage tenants’ expectations.
- Many options to choose from
With currently 18 listed on Bursa Securities, investors have options to choose the type of REIT to invest in be it office, retail mall, industrial and healthcare property. For the curious investor, Malaysian REITs and their assets classes can be found at the Malaysian REIT Managers Association (MRMA) website.
- Small start-up investment
Any physical real estate investment requires a big investment outlay. However, with a REIT, investors can purchase a partial ownership of a big real estate/portfolio of real estate and enjoy the income produced from it as well as its appreciation in value.
Such as high quality, well maintained and sometimes iconic properties with their value always moving up, for example, the KLCC twin towers, DHL warehouses and the Pavilion KL, Sunway Pyramid and Mid Valley shopping malls.
For instance, a unitholder can invest in 100 units of Axis-REIT with a RM167 investment. This investment allows the unitholder to partly own the REIT’s portfolio of 38 properties with a total asset value of RM2.2 billion.
- It’s easy to buy and sell REIT units
All listed REIT units are listed on Bursa Securities and traded like normal equity stocks. It is priced daily and the prices are transparent.
Unlike buying a property which may take more than six months to complete and involve agency commission, the buying and selling of REIT units can be done almost instantly and is cheaper to transact.
- Frequency of your REIT dividend payment
Most of the REITs pay a quarterly dividend which is as good as collecting monthly rents from tenants from a directly owned property investment.
- There is a distinct tax advantage
The tax advantage is the one of the key attractions of investing in REITs. For a REIT that distributes at least 90% of its total yearly income to unitholders, the REIT itself is eligible for exemption from the corporate tax rate of 24% under Section 61A of the Income Tax Act 1967 for that year of assessment.
However, the withholding tax would be applicable on the REIT’s dividends that have been exempted at the REIT level, the schedule of which is appended below:
*Resident corporate investor will enjoy tax transparency but will subject to the prevailing corporate tax rate when it is declared as income.
The 10% withholding tax rate is considered low and competitive as compared to a direct property investment where the rental is taxable at the progressive individual rate to a maximum of 25%.
- REITs sometimes trade their assets like that of a normal property investor
Some REITs behave like the individual property investor and dispose of an asset when the time and price are right. Axis-REIT is one such example. In the last ten years it has completed three asset disposals, the gains of which were fully distributed back to investors as special tax free dividends much to the delight of the unitholders.
- REITs – a hedge against inflation
Investment in a REIT should always be viewed as similar to a direct property investment, i.e. it is a long-term investment and is 100% asset backed.
If you look at the value of property as always increasing and the value of money always decreasing over time, it does not make sense to leave your money in the bank to earn the paltry 3-4% interest offered in a fixed deposit.
At the end of the year, your ringgit will probably buy you 5-10% less goods and services depending on inflation. It’s a negative return.
Q: What is the outlook of the Malaysian REIT industry?
A: The outlook remains positive as Malaysian REITs are a defensive and resilient asset class that appeals to investors with cash income distribution and capital growth. REIT in general has medium long average leases in placed providing investors with certainty of returns.