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Sunday, February 24, 2019

Malaysian REITs: Key financials based on various segments

Saturday, 23 Feb 2019
by pankaj c. kumar

LAST Saturday Malaysians were surprised when the Employees Provident Fund (EPF) announced a a dividend rate of 6.15% for conventional savings and 5.9% for syariah-based savings. The announcement was indeed a pleasant surprise when in general most expected the EPF to announce a payout of between 5% and not more than 6%. I must admit that I too thought at best, EPF would announce a rate of 5.6%.

According to the EPF, the total payout for last year’s performance was RM47.31bil, a drop of just 1.7% from the 2017 total payout of RM48.13bil. Considering the tough local equity markets, the EPF’s ability to generate RM29.28bil in equity investment income alone, which accounted for a total of 57.6% of its income for the year, is commendable.

The dividend became a talk of the town among fund managers and investors as some wondered how it was possible that the EPF managed to churn out such high dividend rates when most fund managers probably failed to do so as the FBM KLCI fell by 5.9% last year while some market indices, like the Bursa Malaysia Construction Index, dropped by a whopping 50%.

Some wondered if there are other ways to make at least 6% a year as the current market environment doesn’t seem to be favourable as the FBM KLCI, on a year-to-date basis, remains lacklustre, rising by just 2%.

The question if one can potentially earn more than 6% a year in total returns may not only be valid for employees but also to the public who are allowed to contribute up to RM60,000 per annum to build-up their retirement nest. It is also a valid question for contributors who had withdrawn money to purchase other investment products or those who had withdrawn all their saving to invest in their own choices of funds.

Looking at alternatives asset classes, people can also invest in bonds or unit trust funds that perhaps are able to generate at least 50 to 100 basis points higher in terms of total returns.

Some investors are also becoming more sophisticated by investing into structured products that can generate a higher pay-out but at a much higher risk if the parameters set for the payouts are breached. Other asset classes include commodities like gold or cryptos like bitcoin but these asset classes only generate capital gain or loss and without any income.

Property is also an asset class to diversify into but with today’s net rental yield of less than 4% and in some cases lower than 3%, total returns have not been spectacular.

The equity market has always been one of the asset classes that an investor could venture into but with the market remaining rather range-bound, what can investors do to generate total returns of more than 6% per annum on a consistent basis?

REITs the answer

There are 18 listed Real Estate Investment Trust (REITs) on Bursa Malaysia. Out of this number, one-third of them are diversified REITs as their revenue based is diversified into multiple property types like the office segment, retail, hotels and industrial. We also have focused REITs, whereby 70% or more of their revenue is derived from one particular asset exposure. Summarised below are the various classification and their respective benchmark valuations:

From the table above we can see that overall, the REITs sector gives an annualised dividend rate of about 5.4% per year based on the latest quarterly results. Investors need only an additional of less than 1% capital appreciation in price for a higher total return compared with the EPF.

The table also shows that focused REITs provide better returns than diversified REITs in terms of dividend yield while REITs which are retail-based have higher returns than those that are non-retail. This is despite the retail REITs trading at almost 30% premium to Net Asset Value (NAV).

Among the retail REITs, the premier REITs like IGB REITs, Pavilion REITs provide returns of just above 5% but some smaller ones like Hektar and KIP REITs provide investors dividend yield of 8% and 7.5% respectively. Capitaland Malaysia Mall Trust is also a high yielder at 7.2%. On a Price/NAV basis, the larger retail mall players do trade at a premium but the above mentioned smaller names are trading at almost 20% discount to NAV. Clearly some of the retail malls are attractive purchases not only from the yield angle but also due to its discount to NAV.

The office REITs overall are trading at about 25% discount to NAV and on average has a yield of about 7.2% – above the current EPF payout. With the exception of the smaller office-based REITs, investors can look at the MRCB-Quill REITs or UOA REITs as both are trading at an attractive yield of 7.4% and 6.8% and at a price to NAV of about 0.88x and 0.78x respectively.

REITs are seen as “defensive” for investor to enjoy a decent set of dividend yield and even without any capital appreciation (hopefully not a capital loss). Some REITs can provide positive returns in excess of 6.15%.Despite the lacklustre KLCI, which is up about 2.4% year-to-date, the Bursa Malaysia REITs Index has shown encouraging performance with a year-to-date gain of about 4.5%. Based on the total REITs dividend yield of about 5.4%, investors stand to generate total returns of 9.9% per annum. That’s 375 bps higher than EPF returns of 6.15%.

It’s a good time for investors to look into REITs as an asset class as they are an effective tool to generate consistent annual returns mainly from dividends as it is a requirement for the REITs to distribute 90% or more of its total income to enjoy the full tax exemption from income earned.


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