Real Estate Investment Trusts (“REITs”) has been gaining popularity as an investment option among Malaysian investors. To date, there are a total of 18 REITs that are publicly listed on BURSA Malaysia. With so many REITs to choose from, here are 5 things to consider before investing in REITs in Malaysia. 

So sit back and keep your coffee mug close as this post will begin ‘reit’ away!

Note: This is a continuation from my previous post titled “Beginner’s Guide to REITs in Malaysia”. If you have not read that post yet, I suggest you have a look at that first before reading this post. I understand from some viewers that it only takes 5 minutes to read it, so go on – I’ll wait for you. 

Now that you have a better understanding of REITs in Malaysia, you are ready to deep dive into selecting the right REITs for you to invest in. Starting from a macro view and all the way down to specific REITs, here are 5 things to consider before you start investing. 

5 Things to Consider Before Investing in REITs

1. Type of Property

It is a given that before you consider a REIT, you will need to know which type of properties you would want to invest in because the primary assets for REITs are it’s properties. Here is a summary of the different segments of properties in the market:- 

Even within the real estate industry, there are different outlooks for each segments within the industry. CBRE (a real estate services provider) releases an extensive real estate market outlook report on an annual basis that you can check out to research further. Nevertheless, I must warn you, that it is one long read for the 2019 report (98 pages thick!). 

Here are just my two cents on some of the segments:- 

1. I’m generally a bit more conscious with the shopping malls & retail segment because there will be a massive incoming supply of new malls (i.e. 27  new malls) expected to be built in greater KL by 2021. With the increase in supply coupled with the rise of e-commerce, I’m expecting this segment to be really competitive. 
2. The office segment will also be expecting a wave of fresh supply with the likes of mega projects like TRX, Bandar Malaysia, PNB118 and The Exchange 106 in the Klang Valley. REITs holding older office units would need to look into ways to retain their tenants or risk losing them to these new office buildings. 
3. As for industrial properties, I’m cautiously optimistic in this segment. With the booming of e-commerce, I foresee the warehousing and logistics players to be growing to meet the increasing demands. So when they start growing, more industrial space is required hence more demand for industrial properties.

Although the broader segment may not be favorable (like shopping malls/retails), it should not hinder you from considering REITs in that segment because there may be some winning stocks in the stack of hay. You just need to find that needle. 

Besides that, it would definitely help if you are familiar with the property itself. For instance, one of the reasons I bought some SUNREIT shares was because I’m very familiar with Sunway Pyramid; the REIT’s most valuable property in their portfolio. For me, it is definitely the more superior shopping mall in the region of Sunway/Subang Jaya/USJ in terms of visitor footfall, tenant choices, refurbishment efforts and future prospects.  

So, identify specific property segments you’re interested  in and do sufficient research on the property itself before investing. 

 

2. Financial Performance and Future Prospects

Just like analyzing any other company, you will need to consider the financial performance and the future prospects of a REIT. Conveniently, you can search up for each listed REITs’ financials on Bursa Malaysia . If this is your first time looking at financials, fear not! I’ll run through some key items you need to look out for. 

Profit or Loss and Other Comprehensive Income Statement

• Revenue – This is the rental collected and ideally it should be increasing year-on-year (duhh!)
• Profit Before Tax – This is the profits earned after deducting all expenses and it should ideally be increasing over the years as well. Nevertheless, sometimes the profits may be inflated due to higher revaluation of properties recognized in a year. So, lower profits in the recent year may not necessarily mean poorer performance. 

Statement of Financial Position

• Investment Properties (Non-current Assets) – This will show you whether there is any purchase/sale and appreciation/depreciation of their investment properties. 
• Net Asset Value – This is essentially the worth of the company; the higher the better. This value is derived from “Total Assets” minus “Total Liabilities”. 
• Gearing Ratio – For REITs, this ratio is derived from “Total Borrowings” divided by “Total Assets”. The lower the gearing ratio, the better; it shows that the REIT has taken up lesser debts against its assets. The Securities Commission has a specific guideline for REITs whereby their gearing ratio cannot exceed 50%. Meaning if REIT A has Total Assets of RM100 million, the maximum bank borrowing it should have is only RM50 million. So in identifying the gearing ratio, you can gauge if the REIT still has room to take up borrowings for future acquisitions or not. 

The above are just some key items to kick start your financial analysis for REITs. Once you’ve gotten the hang of it, you’ll know which figures matter more than others. 

Besides that, REITs with known future prospects are attractive too. Things like property acquisition plans, refurbishment/renovation plans or even building plans like AXISREIT whom developed a warehouse in Telok Panglima Garang and then leased it to Nestle. What you’re looking for are REITs with plans to grow their portfolio because this is where the increase in revenue and profits will come from. 

 

3. Occupancy Rate, Tenancy mix & tenancy expiry

Tenants to REITs is like food to your stomach; it’s always better to have a full stomach instead of an empty one. One key item to consider when choosing your REIT (eh, suddenly sound like choosing veggies in the market pulak) is the occupancy of their properties. 

REITs with higher overall occupancy are generally more attractive because it shows that the REITs are able to attract and retain their tenants. These information can be attained from the annual reports. 

If you would like to do a more advance research, you may even look at the types of tenants and the industries they’re in.

For example, if a particular property is leased to  a majority of tenants in the Oil & Gas sector and if anything negative were to happen to that sector, risk arises on the collection of rental. Thus affecting the revenue of the REIT and subsequently affecting their net profits, lowering dividend payout and plummeting in share price and ultimately, leading to you questioning your investment decisions. “What did I do wrong?”

Sorry, that was definitely an exaggeration but  you get the idea. Another one for the diligent researcher is what the industry calls Weighted Average Lease Expiry (“WALE”). This is essentially the average tenor of all the lease to its expiry. The longer the WALE, the longer is the lease agreement a REIT has with its tenants. Shorter WALEs are deemed riskier because tenants may decide to discontinue the lease. In short, remember that bigger and longer WALEs are better. 

 

4. Dividend Yield (%)

Another consideration when comparing REITs is the dividend yield they have been paying out. This should provide you a gauge of how much returns you can get from investing in the REIT. As per Bloomberg’s source on 2 Jan 2019, the top 3 dividend yield REITs in Malaysia goes to: 

i) Hektar REIT (8.93%)

ii) CapitaLand Malaysia Mall Trust (7.96%)

iii) MRCB-Quill REIT (7.91%) 

Those are really high dividend yields if you ask me. #passiveincome.

That being said, you should not only look at the dividend yields to decide on your choice of REIT but couple it with the other pointers that I have provided in this article. The reason is, although a REIT may be giving high dividends now, if their properties experience a drop in occupancy over the years, the high dividend payout will not be sustainable in the long run. 

 

5. Net Tangible Asset

The net tangible asset (“NTA”) is calculated by using the total assets of a company (less any intangible assets) minus the total liabilities.  The NTA is in another word, the net worth of the company. Similar to how we assess our personal net worth, the NTA shows us how much is a company worth. 

This calculation gives me a rough indication of how much I am willing to pay to purchase the stocks of a REIT. For instance, below is a snapshot of KIPREIT’s stock info from MalaysianStock.Biz: 

The NTA of KIPREIT is RM1.00 per share but as at 19 April 2019, the stock price is only at 87 cents. What that means is, you are paying 87 cents for a stock that is worth RM1.00. That’s a 13% discount! 

 

On the other note, here is a glimpse of IGBREIT’s stock info:

As for IGBREIT, the stock price is RM1.88 but the NTA is only RM1.06. So obviously if you’re purchasing it, you’re paying a premium of 82 cents (RM1.88 – RM1.06).

Why would anyone want to buy it at this price you may ask? Well, if an investor sees that the stock may have potential to increase in value in the coming years (i.e. new acquisition of properties, strategic property locations, good financial performance) then they wouldn’t mind entering at this price now.  

 

Summary

If you’re considering to invest in REITs (or any stocks for that matter), I would highly recommend that you do thorough research first.

Risk comes from not knowing what you are doing – Warren Buffett

Consider the 5 points I’ve mentioned in this post and do give me your suggestions if I have missed out any crucial points in the comment section below. I’d love to have a beneficial discussion with those interested in investing in REITs. 

I hope this post has been beneficial for you to start on your investing “REIT” away. Cheers!