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.
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.
posted by Ho Sang @ 9:53 AM
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