The Malaysian REITs market has grown since its first listing in 2005, with the country’s Islamic REITs already acquiring foreign assets, but we have yet to see a Malaysian REIT – be it Islamic or conventional – which has 100% of its assets listed overseas.
For cross-border REITs, the Securities Commission Malaysia has issued guidelines that include ownership of property – how foreign assets can be owned by a Malaysian REIT, as well as highlighting the laws of ownership in other countries that are acceptable in the Malaysia: covering freehold, leasehold and usufruct.
Usufruct differs from the British Torrents land law system as investors do not own the said property but can have their rights registered for a certain period of time. This applies particularly for properties in the Middle East and CIS countries.
The readiness of the Malaysian market – institutional & retail investors
There is a strong demand for Islamic REITS assuming the appropriate factors meet investor requirements: including assets, yield, sponsors and managers. Another factor is the lack of sufficient Islamic instruments which are liquid and provide good yields.
Since a REIT experiences price fluctuations, if it was more liquid and if it had better dividends compared to other instruments, the demand would be higher. If we issue a new REIT, which is purely Islamic, institutional and retails are willing to take up.
This opinion is based on the feedback AmanahRaya obtained after conducting numerous surveys, discussions and preliminary inquiries with the market and investors of AmanahRaya REIT, as well as based on the other products we have issued before.
Overseas properties provide yields premium to Malaysian REITs, which after net will give about 7.5-8% depending on the price of the properties. However, if you look at overseas assets, investors are expecting to receive about a minimum of 8.5-10% depending on the country, the type of asset and availability of financing: either direct or cross-guaranteed.
Financing for overseas acquisitions can be obtained in Malaysia or in each particular country to acquire the overseas properties. There is no recourse against the REIT because all the borrowing is secured as assets are pledged for the financing. There is also an efficient tax structure in Malaysia to facilitate foreign assets being listed into a Malaysian REIT.
Issues of listing overseas properties in a Malaysian REIT
One of the key issues is the land ownership law in relation to security, recoverability and bankability. Because of these issues, several countries in the Middle East do not allow actual ownership of properties: only a lease of a certain period of time. This lease is unlike the situation in Malaysia where it can be registered for up to 99 years.
Instead, in these countries it only extends between 25 -40 years and with usufruct, some of the land can never be transferred – although it is still possible to obtain the right to use the land. Such a concept is new to Malaysian investors, both institutional and retail, who are unsurprisingly concerned as to how these assets will be secured if they are placed in the REIT.
Malaysian REIT guidelines are silent on the period when the capital is recovered, because they assume that the property will be owned for 99 years or is a freehold. Therefore instead the guidelines look at the existing yield.
However if you look at some other countries, such as Vietnam, they do not have 99 year leases for foreign ownership of assets. But this does not mean that such assets do not provide attractive yields. For example, AmanahRaya transacted one property deal in the city of Mekkah for a private fund which had a remaining lease of about 19 years. Based on the yield and income, investors were able to get a return of their capital amortized over seven years, plus a dividend of between 8–9%.
Discrepancy of asset valuation is another issue, especially when dealing with Middle East assets. Although there are no guidelines issued in the Middle East, the markets are very developed and with a high concentration in real estate – as witnessed by the numerous private equity real estate funds in existence.
If you look at the valuations, the terminal value is very high because the exit value is looked at. If the fund tenure is seven years, the valuation would be based on the seventh year value, so a property that is currently estimated at US$100 million can be valued at US$300 million prior to a calculated discount.
REIT valuation, however, is based on the yield at inception. The problem arises when Middle East companies want to list their assets at a low price. For a REIT, what investors will be concerned about is the valuation at inception, and huge discrepancies will be noticed.
Assets that have 100% foreign ownership must have a reputable partner: either a Malaysian institution or a company that jointly manages the properties – with the REIT manager based in Malaysia, the REIT listed on Bursa Malaysia and the company incorporated in Malaysia.
The investors’ perception of the partners and their experience is fundamental to the success of the REIT. Indeed, the sponsors and the owners of the foreign assets are very familiar with their own markets and they can grow the portfolio. But what about the management? It is vital that foreign assets listed in Malaysia have a good Malaysian partner to act as an anchor. At the very least there must be some collaboration or partnership at the REIT management level.
A further issue is whether to focus on a particular country or invest in multiple countries. For example a target country might have a thriving economy but only have a population of two million. If you focus on assets from such a country, these are likely to be limited. What is the growth opportunity here? If you were to take on the entire region however, it would be too large and there would be the possibility of political risk.
These issues can be resolved if the sponsor is strong and experienced, and has a good partnership with a Malaysian company.
The size of listing also plays an important role in the success of take-up of the REIT. My reference is to assets particularly in the Middle East.
There may be instances where even if a single asset is listed, it may be too big. When a listing of foreign assets is in process, the asset must be sizeable so that it is adequately liquid to allow investors to trade the REIT. A combination of good assets – for example five to 10 assets with a pricing ranging from RM1 billion (US$317.33 million) to RM1.5 billion (US$475.97 million) based on the first listing – is very important based on the feedback we have obtained from investors.
The REIT manager must therefore function as manager of the day-to-day operations of the REIT for a long time. If there is no operation, the assets will be stagnant for the next five years before they either sell or enhance the rental. So from the investors’ perspective, the listing of foreign assets must be portrayed as a vehicle to provide liquidity.
It is the job of the company or sponsor to enhance its operation by obtaining cash flow from the injection of assets, building new assets, and putting them together in order to ensure continued development of the portfolio.
The challenges
Assets are limited to hotels, office buildings, industrial, institutional properties as these are most suitable to be listed in Malaysian REITs and are most acceptable to investors. In the Middle East, there are also residential properties which are only for rent and not for sale. However, there are no residential assets in Malaysian REITs and the Malaysian market is also unfamiliar with investments in multi-family assets.
Investors who invest in foreign assets are also exposed to political risk. Some investors do not understand the geopolitics of a region so they tend to look at the Middle East as a whole. They relate what happened in Egypt, Libya and Bahrain to the Qatar or UAE markets, which are politically stable.
The understandability of the geopolitics of one particular country may affect investor perspective. This is a challenge when wanting to do a cross-border listing, particularly in the context of Middle East assets that are listed in Kuala Lumpur. Investors have to be educated and be provided with more data on the political situation in the Middle East.
The difference of Shariah compliance tolerance is also a challenge. According to Malaysia’s REIT guidelines, the country allows 20% or below of non-Shariah compliant components in terms of the rental.
However, there are certain Middle Eastern investors that will not tolerate non-Shariah compliant components. These are the discrepancies that need to be addressed. However, one good thing about Shariah compliant REITs is that they also allow conventional investors to invest.
Coordination is the most challenging part of getting an asset listed. Listing a Malaysian property alone takes about nine months, but this can extend up to a maximum of two years. In the case of foreign assets, where the sponsors are foreign and the investors are both Malaysian and foreign, this certainly requires endurance. The process undertaken to list assets in Malaysia is the most challenging part of the listing of foreign assets in the due diligence working group.
The Malaysian Islamic REIT market is ready to accept foreign assets. Managers of real estate or real estate funds can explore the opportunities of exiting their assets or private equity into the Malaysian market as a REIT.
Abas Abdul Jalil is the chief operating officer of international business at AmanahRaya Capital Group. He can be contacted at
[email protected]
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This article is an excerpt taken from his presentation during the IFN Issuers & Investors Asia Forum 2011.