The proposal to allow real estate investment trusts (REITs) to purchase vacant land and undertake property development is expected to benefit those with experience in property development and strong sponsors.
The Securities Commission Malaysia (SC) on 14 July released a consultation paper which sought public feedback on the proposed enhancements to the REIT guidelines. Comments to the enhancements are due by 13 September 2016.
One of the key enhancements to the guidelines is to allow REITs to buy vacant land and undertake property development, subject to a 15 percent cap on their total asset value. REITS undertaking property development are also required to retain the property for at least two years upon completion.
“For those who have strong sponsors and experience in development, they will benefit. Not everyone will go into it because there’s a 15 percent cap on the total asset value but if you need to go for development, then it will immediately benefit you,” stated an analyst who declined to be named.
Aside from having strong sponsors, REITS such as Sunway REIT and IGB REIT can also leverage on the experience of the group in construction and property development.
“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,” said the source.
He noted that industrial REITs can easily purchase land and construct a warehouse, while retail REITs will find it hard to do so unless it extends its existing asset, such as a shopping mall.
While he believes that the proposed changes in the guidelines pose greater risks to REITs, it also provides 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 percent 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,” he said.
“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 added.
The impact on retail REITs, on the other hand, may be more neutral, said MIDF Research analyst Jessica Low.
“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,” said Low.
Under the present guidelines, a REIT will most likely renovate or refurbish its older assets to enhance rental rates and yields.
“Overall, these proposals have their pros and cons. One pro is that it allows REITs to have an early entry at a lower cost but one con is that they are exposed to construction risk,” she said.
“However, in the longer term, the positive should outweigh the negative because the yield is higher, maybe by a few percent, than if they acquire existing assets.”
Mangalesri Chandrasekaran, Editor at PropertyGuru, edited this story. To contact her about this or other stories email mangales@propertyguru.com.my
