Malaysian law is changing. Once rarely used, Real Estate Investment Trusts have recently come of age in Malaysia. REIT’s, as they are called, provide an excellent investment vehicle to reach the burgeoning economic powerhouse of Southeast Asia.
Andrew Carnegie (1835-1919), an American industrialist who was the richest person in the world of his day said, "90% of all millionaires become so through owning real estate". For many years, the most favourite way of investment was to buy a property. However, many investors faced problem obtaining a bank loan, being exposed to interest rate volatility and even finding tenants who will pay rent that justified the investment. The landscape in Malaysia has changed by having an alternative property investment tool called Real Estate Investment Trust (REIT). A REIT is a fund or a trust that owns and manages income-producing commercial real estate. A management company for a REIT is permitted to deduct distribution paid to its shareholders from its corporate taxable income. REIT provides investors with an extremely liquid stake in real estate. They receive special tax considerations and typically offer high dividend yields.
The year of 2015 marks the first decade of Malaysian REIT (M-REIT). M-REIT market has shown steady growth over the past 10 years. As at 30 June 2016, M-REIT market had a total market capitalization of RM41.07 billion. The M-REIT industry started off with Property Trust Fund listed on the Kuala Lumpur Stock Exchange in 1989. The term REIT was subsequently adopted and the industry grew with an increasing number of listed REIT. M-REIT is represented by 17 REITs, including four Islamic REITs of which one is part of a stapled structure. The development of the M-REIT market is unique as it provides a common platform for the existence of both conventional and Islamic REIT. M-REIT owns a wide range of real estate, including office buildings, retail malls, hotels, healthcare establishments and industrial properties. Many iconic properties such as the PETRONAS Twin Towers, Mid Valley Megamall, Pavilion Kuala Lumpur, Sunway Pyramid and the Ritz-Carlton Kuala Lumpur are now held under a REIT structure. This could be read as a vote of confidence from property owners to the viability of REITs in Malaysia.
Legally, REITs exists in the form of unit trust in Malaysia. It is governed by general trust law. Trusts are not separate legal entities, but are generally a set of obligations accepted by a trustee in relation to the properties held in trust for beneficiaries. A typical M-REIT consists of a Trustee who holds the units on behalf of the unitholders, a REIT Manager who acts as the asset manager, and a Property Manager who mainly acts as the manager of the portfolio of properties. The REIT Sponsor is another key component of M-REIT as it is usually the largest unitholder of the REIT and shareholder the REIT Manager. The Sponsor is also viewed as provider of pipeline assets to the REIT. In addition to the main components, an Islamic REIT in Malaysia must maintain a Shariah Advisor who comprises learned scholars in Shariah for the purpose of dispensing Shariah-related advice to the REIT Manager on Islamic asset management principles. The instrument constituting REIT is a Tripartite Agreement between three parties which are the manager, the trustee and unitholders. This tripartite relationship is governed by a Deed registered with the Securities Commission. As prescribed under section 288(1)(b) of the Capital Market and Services Act 2007, a management company should ensure that there is a deed in force for a fund. The deed should contain the minimum requirements prescribed under Schedule A of SC Guidelines and those specified under securities laws. A management company, or its adviser should submit an application to register and lodge the deeds in accordance with the requirements and procedures set out in Appendix III of Schedule D of SC Guidelines on REIT.
In Malaysia, the Guideline on REIT is issued by the Securities Commission under section 377 of the Capital Market and Services Act 2007. The first version of the Guidelines was issued on 3 January 2005. On 21 August 2008, the Securities Commission issued the revised Guidelines on REIT to enhance the attractiveness of Bursa Malaysia as a destination for REIT listings and promote a vibrant and competitive REIT industry domestically and regionally. The same Guideline was updated on 28 December 2012. To further facilitate the sustainable growth of the M-REIT market, the Securities Commission is currently undertaking a comprehensive review of the REIT Guideline through the Public Consultation Paper No. 3/2016 dated 14 July 2016. In undertaking this review, the Securities Commission has taken into consideration the evolving needs of investors and the REIT as well as developments and regulatory requirements in the regional markets. The Securities Commission has had discussion with various stakeholders in relation to the proposals under this consultation paper and some of their views have been incorporated. The 16 proposals by SC will expand the scope of permissible activities, significantly enhance corporate governance on M-REIT disclosure and streamline the efficiency in post-listing requirements. Through this Consultation Paper, SC has proposed further liberalization to the permissible list of activities to be undertaken by M-REITs. The key proposal is to allow M-REITs to acquire vacant land and to undertake property development subject to a cap of 15% of the enlarged total asset value of the REIT. SC further proposes to cap the leverage level at 50% of total asset value and to remove the option of allowing REITs to increase their leverage thresholds by obtaining the unitholders’ approval. In addition, since the current REITs Guidelines have no provisions for REITs to buy back their units, the SC proposes to allow listed REITs to buy back their own units.
International investors may have read about the recent Sime Darby Bhd proposed reverse takeover (RTO) of Singapore-listed Saizen REIT is regarded as a positive development as the exercise will enable Malaysian conglomerate to monetize assets in Singapore and Australia. The discussion is still at framework agreement stage and pending signing of sale and purchase agreement. Under the propose RTO, Sime Darby will inject some of its industrial properties located in Australia to Saizen REIT for the exchange of new units in Saizen REIT and cash. The REIT platform is expected to have greater flexibility in its future fundraising exercises to build a sizeable international portfolio assets, in which Sime Darby will benefit from its direct stake in Saizen REIT.
However, unlike Singapore, Hong Kong and Japan, M-REIT market is still relatively small and untapped. According to analysts, the implementation of the goods and services tax (GST) in April last year caused a slowdown in domestic consumption and lower retail sales had a negative impact on M-REIT with exposure to shopping malls. This is because some managers have a higher proportion of turnover rent, which is charged based on the tenant’s monthly revenue, than fixed base rent. Such is the case of IGB REIT, which owns MidValley Megamall and The Gardens. The performance of M-REIT is also impacted by the sluggish economic outlook and uncertainties surrounding global crude oil prices. Despite these strong headwinds, the period of uncertainly is unlikely going to last long before M-REIT gets back in the game again especially after the proposed amendment to REIT Guidelines by the Securities Commission. According to Securities Commission, the move to liberalize the requirements on M-REIT will enable them to create more value for their investors.
For more information please contact Mohamed Ridza, our Malaysia LAWorld member in Kuala Lumpur.
Mohamed Ridza & Co.