I covered the products offered by banks in part one of this post about alternatives to the ASW 2020. In this instalment, I will cover the hot topic of REITs.

More and more REITs are coming onstream since the launch of the Malaysia’s maiden REIT back in 2005, the Axis REIT. REIT (pronounced “reet”) stands for real estate investment trust. Given Malaysians’ love affair with bricks and mortar, this is a very flexible investment vehicle that allows us to indirectly own a stake in say, Starhill Gallery or the Kuala Lumpur JW Marriott simply by buying the building’s REIT through Bursa.

What’s more you don’t need a lot of money. The closing price of the Starhill REIT as at 8 September 2006 was RM0.95 and 1,000 shares will cost you just RM950. If this sounds interesting, read on…

The concept of REITs is very similar to that of unit trusts. In the case of UTs you are indirectly buying into a diversified portfolio of equities/fixed income securities which is managed by a professional fund manager. In the case of REITs, the portfolio comprises real estate (or property mortgages if it’s a mortgage REIT). Unlike UTs however, REITs are closed end funds i.e. they have a fixed number of shares and are traded on the stock exchange. So the REIT’s share price will fluctuate accordingly with buying and selling activity, instead of directly corresponding to the Net Asset Value (NAV) or the market value of the REIT’s net assets.

The benefits of REITs to investors are similar to a direct investment in property where you can expect to get steady (rental) income and also capital appreciation. So as an asset class, they are quite stable and it has been said, sit somewhere between shares and direct property investment in terms of risk and return.

Thus, REITs, being in essence a property trust and having a low correlation to other equities, are useful to have in your asset allocation portfolio as a “proxy” for owing property directly.

REITs also have a “one up” on buying property directly in that they are more liquid (buying and selling is easier since it is done through the stock exchange), you don’t need a large sum of money to invest or to assume a hefty loan valuation is readily done (can find out the REIT’s share price easily compared to property valuations), and there are no expensive legal fees, stamp duties or red tape (eg. if you’re a foreigner there’s no need for FIC approval). 

The REITs that you can currently buy on Bursa (closing price as @ 8.9.06 in brackets) are:

Axis REIT (RM1.78) – owns Axis Business Park, Menara Axis, Crystal Plaza among others

Starhill REIT (RM0.95) – owns Starhill Gallery, Lot 10, JW Marriott

UOA REIT (RM1.06) – owns UOA Buildings in KL and Bukit Damansara

Tower REIT (RM0.92) – owns Menara HLA and HP Towers

So what’s the upside potential for REITs then? Well, for one the regulatory environment continues to improve as regulators work to close the competitive gap between Malaysian REITs and their regional counterparts (up until recently, there were some who considered Malaysian REITs inferior to foreign REITs) 

Our local REITs received a boost from the recent 2007 Budget when special incentives were announced including:

 – a tax exemption for REITs that pay out more than 90% of their income (means higher dividends for us investors)

 – a reduction of tax on dividends received by individual investors (foreign and local) to 15%.

  – for foreign institutional investors, the tax on dividends received is reduced to 20% from 28% previously, to attract more foreign institutions to invest

Yields also look set to increase given the relaxation of the gearing limit from 30% to 50% by the Securities Commission in July this year. This should spur more new property acquisitions by the existing REITs to boost their revenue. This could be very appealing to investors in that even back in February 2006, a report in Personal Money magazine forecasted the 2006 yields for Axis, Starhill and UOA to be 6.9%, 6.3% and 6.5% respectively.

With interest rates very possibly peaking in the near future, and inflation still hovering at 4% (real estate is a natural hedge against inflation), I believe REITs as an asset class is in a stellar position to benefit.

If you want to read more, Velo has done some research in his blog on the Axis and Starhill REITs. Also Larry in his “light-hearted” blog spoke about the KPJ Al-Aqar REIT, Malaysia’s first hospital REIT comprising properties under KPJ Healthcare.

For interested investors, in addition to the four REITs mentioned above and the KPJ REIT, there will shortly be conventional and Islamic REITs coming from Amanah Raya. Also, REITs coming from the big boys of Bursa: Sunway, Boustead and the hotly anticipated Landmark (aka Sungei Wang) REIT. The latter comprises Sungei Wang Plaza and the fancy-schmancy Langkawi resorts (the Andaman and the Datai)