IPO of Tower REIT

There have been articles on Tower REIT IPO for the last 2 days from Chinese, English or Malay newspapers. According to the articles, Tower REIT is part of the larger Hong Leong group, which has several prime property assets under its belt. Few things that attract me:

1. Tower REIT will distribute 100% of its net profits for FY06 and FY07 as dividends, providing a dividend yield of 6.42% for FY06 and intend to distribute at least 90% (of its net profit) for each financial year.
   
   
2. The two properties in Tower REIT's listing portfolio are Menara HLA (86% occupancy) and Menara HP (88% occupancy). Besides, GuocoLand (M) Bhd is currently building two office blocks as part of its 16-acre PJ City development along the Federal Highway.
   
   
3. The listing is timely in line with the better outlook for the commercial property market and tax incentives for REIT as announced by the Government last year.
   
   
4. Increase of Interest Rate to overcome inflation.
   
   
5. Good performance record of REIT from other countries like Hong Kong, Singapore, etc.

However, the REIT in Malaysia does not perform that well recently. Perhaps, Malaysian investors are still hoping for High Return from share investments. The concept of diversify is not being implemented yet.

Unfortunately I have been facing some financial problem lately, or else I will still be interested with Tower REIT.

Factors to consider in REITs

There's been 3 REITs in Malaysia Stock Market recenty and I had managed to get 2 of it. The return had been very good for AXIS REIT since it was the first REIT in Malaysia. Then, the rest has been very stable and what I hope for is the dividen returns. However, I still think that REIT is definitely a better option than Fixed Deposit and Unit Trust.

Below are the few important factors to be consider before invest in REIT which I got it from "Insider Asia":

Market timing
Timing is probably the most important factor in any investment decision, and that applies here as well. One has to take a view on the local property market. Has it peaked, or is it on the way up?
The best performing Singapore REITs -– CapitaMall and Ascendas -– were listed in 2H2002, when the property market was picking up and interest rates were at record lows. SGD deposit rates were then at around 0.5% as opposed to the REITs’ initial yields of 6.9% and 7.7% respectively.
The large yield differential made the two REITs very attractive, and provided immediate capital gains. Purchases of buildings funded by borrowings were also immediately yield-accretive. Newer REITs such as Capita Commercial and Suntec, listed in late 2004, are not performing as well since they were launched later in the cycle and Singapore dollar fixed deposit rates have risen to 1.5%.

Volume or rate growth?
A REIT’s income can rise from volume or rates, apart from managing costs. Raising rental rates is subject to general demand-supply factors or a particular property’s appeal. If a REIT has buildings that are all fully occupied, it certainly looks good as far as present income and yields are concerned. However, it also means there is little scope for volume growth.

Lease agreements
Tenant lease agreements are important, as is client profile. How long are the lease agreements? Do they allow for step-up in rents? Are clients locked in with stable income, or are many leases expiring soon? Will the majority of leases expire during an upcycle –- when rental rates can be easily raised; or during a down-cycle -– when landlords are at the mercy of tenants?

Accretive value
Other ways include extracting more value –- such as by reconfiguring existing buildings or through refurbishments. Acquisitions are another means -– by acquiring additional property assets that are yield and NTA accretive. Malaysian REITs are allowed to gear up to 35% of their assets.

Quality of assets
As in any property investment, location and quality of underlying assets in a REIT are important. Are they well-located, prime properties, or generic ones that are price-sensitive? Do they have a “pull” factor that gives them the ability to easily raise rent and yet maintain full occupancy?

Land status, building age
Investors should also look at the age and land status of a REIT’s underlying properties. For older buildings, refurbishments may deplete cash flows (and yields) for a particular year. Freehold property is preferred over leasehold, since one has to set aside a renewal premium on expiry for the latter.

Tax structure
The tax structure currently favours Singapore REITs over Malaysian ones. For individuals, dividends from Singapore REITs are tax-free, but those from Malaysian REITs are taxed at each individual’s income tax bracket –- so it is more attractive for lower-income investors. For high net worth investors, a REIT’s 8% yield becomes 5.8% after tax, not much more than a 3.7% one-year fixed deposit, especially after brokerage costs and imputing expectations of interest rate hikes.

Payout ratio
Unlike Singapore REITs, a minimum 90% payout ratio is effectively mandated, but there is no stipulation for Malaysian REITs. Thus, there is no guarantee current high yields can be sustained in the future. Axis has pledged a 95% payout rate for the next three years.

Interest rates
If interest rates start to rise, REITs’ yield advantage will narrow. We expect local interest rates to rise by 25 basis points (bp) by year-end, and another 25-50 bp next year. Investors also have to take into account that the Malaysian stock market’s 4.2% dividend yield is among the region’s highest.

Short-selling is BACK

"Short selling is an important element in capital market flexibility where it allows an investor to sell borrowed shares and to buy them back later to complete the transaction. It is usually used to hedge portfolio risk and also as a means to make a profit by buying back at a lower price."

Short selling was suspended at the height of the Asian financial crisis in 1997 to curb excessive speculation in the stock market. Malaysian capital market was one-sided with retail investors coming in only when there is certain period of steady increases. This doesn’t happen all the time, in fact historically on an average a bull market takes place only once in six or seven years. The performance will be dull for the rest of the time.

Today, Malaysia already has the framework in place to benefit from regulated short selling, and have enough control to avoid unhealthy market practices. Therefore, Short selling activity is allowed again on 23 March 2006, which has the capacity to increase velocity in the market and could attract more investors to the capital market. Besides, investor can create new strategies for investing.

However, the number of counters available for short selling would be limited to ''less than 100''. Does this affect the outcome? We will see…

"The 9MP Plan is focusing on making the private sector to take the lead role in spearheading economic development or growth which include initiatives to enhance SME development as well as increasing the number and level of public-private sector partnerships. The establishment of SME Bank in 2005 represents the first major step towards providing access to financing for SMEs. "

Soon after the 9MP announced, the performance of Second Board and MESDAQ showed good results. The uncertain global political and economic scenario has effected the performance of major companies and the recent performance of Main Board has been very unstable. As the SME seldom being effected by global affair, we shall focus on the Second Board and MESDAQ this year in order to have extreme return of our investments. The annual dividens by major companies just not enough to cover our expanses of high fuel prices.

For majority or minority

The fuel price hike was hot news to Malaysia after the government had announced the increase of 30 cents per liter on the petrol price. With increase of 30 cents per liter the government will be able save an estimated amount of RM4.4bil by reducing fuel subsidy and promised to develop the poor public transportation. Our Prime Minister YAB Dato Seri Abdullah Badawi make comments on the fuel price increased by saying that the subsidy of petrol will be only benefit the rich group whom used petrol frequently and with the move of expanding the public transport the ‘rakyat’ will be benefiting now.

Thailand and Indonesia can move towards abolition of fuel subsidy that we see no reason Malaysia cannot do so. However, the Government should precede with caution its intention to divert the subsidy saved for development. With the favour only a few major construction company might get the tender when the government wanted to enhance the public transport facilities. Major construction company that shows good record and make good profit like IJM, GAMUDA and ROADBLD will have the advantage to obtain more government projects contract. Government tendering should be making more transparent and with everyone will be able to get a piece of the pie.

Malaysians will certainly not accept a situation where the benefits of the majority from the subsidy be diverted to a few who will benefit from the contracts dished out. If this happens then it is like taking the subsidy of the majority and putting it into the pockets of the minority. Hopefully, this will not happen.

Mobile Business is Competitive

The result of the second 3G spectrum tender last week was unexpectable. Digi which has just given out dividens to it's share holder recently is now facing a great impact. The share droped 10% on the same day. Besides, thenew interconnection rates for both mobile and fixed line services definitely benefit the Giant Celcom.

However, the ministry directed MiTV Corporation Sdn Bhd and Time dotCom Bhd to work with the unsuccessful bidder, DiGi Telecommunications Sdn Bhd, and other service providers as a mobile virtual network operator (MVNO) to achieve a "win-win situation".

The mobile business in Malaysia has been very competitive and the 'Red Ocean Strategy' must come to an end.The 3G is a must to survive as it brings uniqueness to the license holders. The Malaysia's 3G is still at the begining stage and there are definitely more to explore and more demand from consumers.

Think twice and do some analysis before invest in telco shares as there are still uncertainty.

Fuel Price Increase

Abdullah said it was not the Government’s policy to dip into Petronas’ coffers to subsidise domestic fuel prices. Income from the national oil company was used for development projects and set aside for investment.

Goverment concern that increasing the prices in stages would create more uncertainty and allow the prices of goods to spike at regular intervals. As a solution, the price increased 30 sen for year 2006 and will promise stable fuel price regardless of world price of crude oil.

The more stable fuel price for the rest of the year might stabelize Malaysia's economic although we do feel the pain for these few months. The market will soon adapt to the fuel price and things will back to normal again. The foreign investor will probably happy with the policy and predict Malaysia to have stable economic growth. Now a day, share market doesn't really effect by fule price anymore unless there's some dramatic changes.

However, let's think outside the box where it might cause political unstable and public reaction do count as well.