Thursday, September 15, 2005

Understanding REITs in Malaysia (2)

Why did the Property Trusts under the old guidelines not do well?

There were not many incentives given and little gearing was allowed. Quality of the assets, low yields (returns from investment), falling dividend per share, passive management, etc. all contributed to the lackluster performance of property trusts before the new SC's guidelines.

Why do companies with such good rental properties want to put their rental properties into REITs?

Because they can unlock their rental properties value. This means they can sell, for example, 30% of the ownership of the property to the public, foregoing future rental income, in exchange for instant upfront cash pile and still be in control of the properties.

What is the criteria of a good REIT?

It must have good quality assets and good quality management. You must buy it at a good price and the management should grow the rental properties and increase the rental income for you.

Good quality assets means well-managed rental properties at good locations, broad base tenants (without the fear of losing one or two big tenants), and therefore the rental incomes will grow or at least be maintained.

Good management will drive growth through acquisitions or the building of more rental properties to increase rental incomes.

We like REIT with rental properties like shopping malls. Office rental incomes are generally a bit more volatile and hotel business may be cyclical. So we like only REITs in which their main rental properties are red-hot shopping malls like Mid Valley and Jaya Jusco (if their owners are willing to put them into REIT). If the shopping malls deteriorate you will know when you shop. For investors without a good understanding of property markets, REITs with assets like shopping malls are the safer investments.

What makes the prices of REITs stocks fluctuate?
Beside normal fluctuations due to simple demand and supply, when the market expects the rental to go soft prices of REITs' prices will fall. When the market expects rental to go up, REITs stock prices will go up. In a way, a good grasp of property market knowledge will be helpful in investing in REITs.

Part 1: Understanding REITs in Malaysia
Part 2: Understanding REITs in Malaysia (2)
Part 3: Investing in REITs

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