Chat with Stewart Labrooy: Malaysia REIT – Interesting Times Ahead!

Growth, transparency and healthy competition. These are the key words best used to describe the REIT industry in Malaysia. Now, if you are an investor, would these be the exact same things are you looking for? Growth is needed to beat inflation, while competitiveness ensures everyone does their best. All these, however, are nothing without perhaps one of the rarest commodity in corporate governance nowadays – transparency.

In this Bernama newspiece, Datuk Jeffrey Ng, CEO of Sunway REIT Management has this to say:

“Global uncertainties leading to volatility in the equity markets has benefited REITs in general, as investors switch to defensive and yields generative investment.”

He noted that the low interest rate environment has also led to fund managers and investors sourcing for alternative investment that offers higher yields

All these above are also the exact same things local and foreign institutional investors are looking for, the things that pique their interest to put their money in M-REIT. How do I know? I don’t. That’s why I asked Mr Stewart LaBrooy, Chairman of the Malaysian REIT Managers Association on the sentiments of institutional investors, and a couple of other things as well.

Here’s Part 3 of my interview with Mr Stewart.

MRMA

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Lieu Ching Foo: What is the current sentiment of local and foreign institutional investors in M-REIT? As in, are they buying/holding/selling?

Stewart LaBrooy: In response to the financial crisis of 2008-2009, investors have questioned some of the underlying assumptions of modern portfolio theory.  In particular, investors have observed negative investment returns of greater magnitude and higher frequency than those implied by the normal statistical distribution of investment returns on which most asset allocation models typically rely.

That’s basically the equivalent of having a “hundred year storm” every 10 years.

That real estate should be “a steady part of the diet. Optimized portfolios may seem counterintuitive given the volatility of real estate during the financial crisis. However, the high and steady dividends distributed by REITs year-in and year-out play a large role in the total return of REITs.  Returning to the Lost Decade, when the S&P 500 Index posted its compound annual total return of negative 0.95 percent, it is noteworthy that the FTSE NAREIT All Equity REITs Index delivered a compound annual total return of positive 10.63 percent.

Dividends are important! Research reveals that the relatively high and stable dividends of REITs have provided investors with appreciably higher total returns when compared with other equities.  Because REITs are required to distribute annually to their shareholders at least 90 percent of their taxable income in the form of dividends, approximately 56 % of the total return from U.S. REITs over the period December 1989 – December 2010 came from dividends, compared with only 23 percent of the total return from companies in the S&P 500 Index.

With the current volatility in the equity markets I believe M REITs have found a sweet spot with the investors (both foreign and local). What we see here is an unprecedented listing of the “Crown Jewels” of properties – Pavilion, Sunway Pyramid, MegaMall and perhaps the KLCC as well. This has enabled all investors to participate in the ownership of the best properties in Malaysia. The current trend is to buy and hold on to M REIT stock and in this flight safety we have witnessed an unprecedented compression in yields across the board. MREITs now trade at premiums of 150-300 basis points above the 10 year MGS rate as compared to Singapore where the premiums are more like 400-600 basis points.

The REIT managers in Malaysia have displayed a strong sense of commitment to their shareholders in providing growing dividends and increasing values to their shareholders.

Such transparent behavior will set a good example to other REIT markets.

Lieu Ching Foo: On Axis REIT – what is the rationale for REIT manager to opt for private placements over public placement (rights issue)?

Stewart LaBrooy: The private placement route is much quicker way of raising capital and the discounts given tend to be small (3-5%) as compared to rights issues where the discounts can be as high as 20% and is highly dilutive.

In addition it is our experience that a rights issue can take up to 6-12 months and the pricing is subject to market forces in that period.  A placement can be completed in 2-3 months with tight pricing.

Stewart LaBrooy

A prominent speaker on Conventional and Islamic REITs in the region, Stewart LaBrooy is the CEO of the first REIT to be listed on the Mainboard of Bursa Malaysia in 2005; Axis REIT Managers Berhad.

Stewart holds a Bachelor of Engineering (Hons) degree and a Post Graduate Diploma in Business Studies from the University of Sheffield. He is a Board member of the Asia Pacific Real Estate Association (“APREA”) and the Chairman of the Malaysian REIT Managers Association (“MRMA”).

 

Lieu Ching Foo: Going forward to 2013, what is the outlook (briefly) of the following REIT assets type:

Stewart LaBrooy:

a) Retail – Still showing good growth prospects in rents but hard to grow the portfolio due to limited stock in the market.

b) Office- with 25 million sq. ft. coming on stream in the next two years and absorption of three million sq. ft. a year an oversupply is looming. Rents could soften.

c) Hotels/hospitality– limited quality buy opportunities but room rents are increasing.

d) Industrial– steady with ample buy opportunities. Rents are increasing due to limited new supply coming onto the market. Johor’s industrial sector is booming.

e) Plantation (Al-Hadharah Boustead) – a lot will depend on the pricing of palm oil internationally. Its growth is linked to the climate conditions and pricing- a very difficult call short term. However it does have the feature of being a large land bank with a steady dividend return and with commodities becoming a favoured asset class it does have a long term upside.

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Are you with me to board the ship? 🙂

REIT Method, the first online educational course on REIT investment in Malaysia  by myself and KCLau,  is open 2-3 times a year. Get priority notification and a FREE Report to go with by entering going to REITMethod.com

If you missed Part 1 of the interview, click here.

If you missed Part 2 of the interview, click here.

This Post Has 5 Comments

  1. Always a pleasure, TY.

  2. CF, Thanks for sharing this interviews with me. Good job.

  3. Thanks man. Didn’t want to sound too analytical over here, but if you were to see the Price/NAV ratio, it’s already near to 1.5, which means its price now commands 50% premium above its valuation, similar to many retail REITs now. Even before reaching its current price point, it is already way above its NAV at RM 2.70 a few months back. I have a small positions in it but would have never thought it would continue to surge. An entry now would yield only around 5.5 percent.

  4. Another quality post from CFL on REIT! Keep up the good work bro!
    I’m always very keen in Axis REIT for their consistent dividend payout. The only thing stopping me putting some fund into it is the current high price. What’s your view on their price CF? Since you are very much expert yourself in REIT, do you have any thought on what is a fair market value for Axis REIT?

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