KUALA LUMPUR: “Chronic” speculation has driven up prices of industrial land to outstrip even that of some advanced Western countries, said Malaysian Real Estate Investment Trust (REIT) Managers Association chairman Datuk Stewart LaBrooy.
Citing an example, he said the cost of industrial land in Germany, at RM20 per sq ft, was now cheaper than Malaysia.
“I can't find land for RM20 per sq ft here unless it is a swamp, in which case it would need a lot of money to rehabilitate.
“There has to be a shift in thinking. The various states have to allocate land for industrial developments, and not put them in the middle of nowhere, but next to townships where people can live and work nearby.
“We try to work with the local authorities to get land prices in line with international standards. Then we can inject them into REITs at decent prices,” added LaBrooy, who is also chief executive officer and executive director of Axis REIT.
Speaking to reporters after the firm's AGM on Tuesday, LaBrooy explained that the office and industrial-based Axis REIT aimed to maintain its portfolio yield at 8%.
“We have made acquisitions below 8% before but they were on long leases, which averages out to a higher yield in the long term. I would take a lower yield if I think the property has a lot of upside and we can do something with the asset later.
“We don't sweat the fact that we have to buy at a lower yield, because we can kick the asset up the food chain.”
Kenanga Research told clients in March the current average portfolio net property income (NPI) yield for Malaysian REITs under its coverage stood at between 6.5% and 8.9%, versus the prevalent cap rate for offices and retail spaces of 6%-7% and 5%-6.5%, respectively.
The cap rate refers to the rate of return on a real estate investment based on its expected income.
“As asset values have risen aggressively over the years, it becomes more challenging for REITs to acquire portfolio NPI-accretive assets as rental rates are lagging behind. Hence, asset financing structures must be optimal to extract the best return from such assets,” the brokerage said in a report.
“Evidently, Axis REIT's last few acquisitions were either lower than or close to its portfolio NPI yield of 8.9%. It's recent acquisitions of Wisma Academy and The Annex are projected to carry NPI yields of 8.5% and 6.7% respectively, lower than its portfolio NPI yield of 8.9%.
“In another instance, Sunway REIT's recent acquisition of Sunway Medical Centre fetched an NPI yield of 6.1%, lower than its estimated portfolio NPI yield of 6.6%,” Kenanga Research added.
Maybank IB Research also revised last week its call on the domestic REIT sector to “neutral” from “overweight” due to their premium valuations, a likely interest rate hike in the fourth quarter and competition from new investment vehicles like the business trust.
It downgraded retail-based Pavilion REIT, upcoming stapled securityKLCC Property Holdings Bhd, Sunway REIT and IGB REIT to “hold”, while keeping its ratings unchanged for Axis REIT and Quill Capita Trustpending a review. Maybank IB's only “buy” pick is CapitaMalls Malaysia Trust.
“It is getting tougher for Malaysian REITs to find good-quality, yield-accretive acquisitions due to demanding pricing from the sellers and stiffer competition from other asset owners (insurance funds).
“The booming REIT market (hence, good pricing for assets) and the new stapled REIT structure may also encourage asset-rich developers to adopt similar investment strategies to gain tax benefits and recurring income streams, thus reducing acquisition opportunities for existing REITs. Hence, support from the REIT sponsor on asset pipelines is crucial,” the research house noted. - The Star
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