REITs with strong sponsors, experience in property development to gain most from new rules

PETALING JAYA: The Securities Commission Malaysia's (SC) proposal to allow real estate investment trusts (REITs) to acquire vacant land and undertake property development will benefit those with strong sponsors and experience in property development.
On July 14, the SC released a consultation paper seeking public feedback on proposed enhancements to the REIT guidelines, as part of its efforts to facilitate growth of the maturing REIT market. Comments are due by Sept 13, 2016.
One of the major enhancements is to allow REITs to acquire vacant land and undertake property development, subject to a cap of 15% of their total asset value. Note that REITs that undertake property development are required to retain the asset for at least two years after completion.
Other proposed enhancements in the consultative paper include steps to strengthen corporate governance practices as well as changes to enhance the level of disclosures and reporting to unit holders.
"For those who have strong sponsors and experience in development, they will benefit. Not everyone will go into it because there's a 15% cap on the total asset value but if you need to go for development, then it will immediately benefit you," said an analyst who declined to be named.
The analyst told SunBiz that REITs like IGB REIT and Sunway REIT already have strong sponsors, and would be able to leverage on the group's experience in property development and construction.
"For some of the smaller REITs, they may not have the expertise and if their sponsors are not strong, the benefit may not be as much for them," he said.
Zooming in on segments, he said industrial REITs can easily buy land and build a warehouse, whereas for retail REITs, it would be more challenging to do so unless it is extending its existing asset, for example a shopping mall.
Overall, he believes the proposed changes in the REIT guidelines pose greater risks to the REIT sector but also bring greater returns.
"Some investors may not want it (greater risks). At this stage, they are looking for certainty. It is not a big risk; 15% is not huge in terms of total assets but it is still a risk. For the REITs, it is a good thing for them in terms of growth.
"Looking at the environment today, it is so tough for them to actually seek growth in the current market. Thus, relaxing the rules will provide them ample opportunity to do so," he said.
Meanwhile, MIDF Research analyst Jessica Low said the impact on retail REITs may be more neutral, considering the existing portfolio of Malaysian retail REITs today.
"The existing retail REITs like IGB REIT and Pavilion REIT already have quite matured assets and may not need to redevelop their assets. For those REITs where the age of the buildings is older, they now have another option, which is to redevelop them," she said.
Under the current guidelines, a REIT will most likely refurbish or renovate its older assets in order to enhance yields and rental rates.
"Overall, these proposals have their pros and cons. One pro is that it allows REITs to have early entry at a lower cost but one con is that they are exposed to construction risk. However, in the longer term, the positive should outweigh the negative because the yield is higher, maybe by a few per cent, than if they acquire existing assets," said Low.
She said the proposed enhancements are a good sign that the SC is liberalising the REIT sector.