More ‘offbeat’ assets for REIT

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KUALA LUMPUR: Malaysia has yet to fully expand the full potential of the real estate investment trust (REIT) structure. Assets of local REITs presently consist mostly of commercial buildings but the Securities Commission Malaysia (SC) guidelines allow a greater flexibility for the inclusion of various other types of real estate, according to financial executives.

Going by trends abroad, shopping malls, offices, warehouses, hotels and hospitals are the standard REIT options. In recent developments globally, more offbeat assets like billboards, casinos,

telecom towers, restaurant chains, cinemas or even prisons are making their way into a REIT, industry experts said.

US media group CBS Corp, for instance, recently announced plans to spin off its outdoor advertising business or billboards into a REIT. Executives of New York-listed Penn National Gaming Inc are reported as saying more gaming companies would follow their lead in spinning off casinos into a REIT or even sell their casino premises to a REIT to free up cash.

REITs are property trust funds that invest primarily in rent or income generating real estate. The main benefit for local listed REITs is they pay zero corporate tax by distributing to unit holders at least 90% of profits annually.

According to the SC’s guidelines for the issuance of REITs, the “real estate” for a REIT listing is defined as “land and all things that are a natural part of the land as well as things attached to the land both below and above the ground”. That would apply to telecom towers.

Axiata Group Bhd president and group CEO Datuk Seri Jamaludin Ibrahim told The Edge in an interview recently the group would consider listing its telecom tower assets under a REIT or business trust, should it decide to monetise these assets.

“When you know the ground rules inside out, the possibilities are limited only by one’s imagination. Certainly, the authorities would need to be supportive to allow developments [in the REIT sector],” said an investment banker, adding that “anything with a rental lease structure” has the potential to be a REIT.

The banker, who does deals locally, expects asset owners with large capital needs or debt to be more receptive to investment bankers for REIT. In fact, he feels that the government has not fully tapped into REIT to monetise its assets to pare down the national debt and cut the budget deficit.

With the promise of generous and reliable dividends, REITs have been sought after by investors seeking stability amid economic uncertainties, especially in the current low interest rate environment.

While the local REITs did well with several gigantic listings over the past year, such as Pavilion REIT, IGB REIT and the upcoming KLCC stapled REIT, the composition of their assets is mostly commercial buildings.

So far, the country has only one offbeat REIT, the Al-Hadharah Boustead REIT, listed in 2007. It is a syariah-compliant trust that relies on oil palm estates and palm oil mills as its primary income generating asset.

According to Al-Hadharah Boustead’s listing prospectus, the plantation assets are leased back to the vendors [Boustead Plantations Bhd and Boustead Properties Bhd] for a cumulative period of between three and 30 years. Together with the fixed rental, the REIT also gets a share of additional profits, should crude palm oil prices go above the pre-agreed threshold in the tenancy agreement.

But unfortunately, other local plantations firms have not followed Al-Hadharah Boustead’s lead in floating their oil palm estates despite the tax benefits accorded under a REIT.

“I believe companies that go for REITs are looking more at monetising the assets [up front] while still having control [over the asset] plus income from it, rather than going for the tax benefits per se,” said Linda Koh, an analyst at Asia Analytica Sdn Bhd.

Bankers said as investors become more familiar with the benefits and risks, more asset owners might be open to explore REITs as well as business trusts, loosely described as a hybrid between a regular company and a REIT.

Unlike REITs, business trusts have to pay corporate tax even if they pay high dividends but are allowed to have higher levels of debt and assets under construction.

Investment bankers see owners of telecoms towers as well as highway and power concessions as potential pioneers of business trusts in Malaysia, given their steady cash flow and high capital needs.

Analysts like Koh think more companies may follow KLCC Property Holdings Bhd’s lead in exploring the “stapled-REIT” structure, should it make sense for their strategy.

“But it remains to be seen just how well investors welcome a stapled structure [a REIT within a regular company] relative to a straight [regular] REIT that has a more predictable income stream, and thus lower risk profile,” Koh said.


This article first appeared in The Edge Financial Daily, on February 4, 2013.

If investment bankers get their way, chances are that more companies would consider monetising their assets if this makes more sense than owning 100% of them, market watchers said. CBS stocks, for instance, jumped following news of the planned billboard spin-off.


This article first appeared in The Edge Financial Daily, on February 4, 2013.

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