This article first appeared in The Edge Malaysia Weekly on August 28, 2017 - September 3, 2017

KIP Real Estate Investment Trust (KIP REIT), which invests in community-centric retail properties in the country, offers one of the highest yields among the 18 investment trusts listed on Bursa Malaysia.

The REIT’s annualised yield of 7.6% over the five months since its listing on Feb 6 to June 30, 2017 (financial period 2017), based on the closing price of 92 sen on July 25, exceeds its peers’ average of 5%. In comparison, Sunway REIT has a 5.5% dividend yield; CapitaLand Malaysia Mall Trust, 5.3%; IGB REIT, 5%; and both Pavilion REIT and KLCCP Stapled Group, 4.6% — based on PublicInvest Research’s estimates in its Jan 16 initial public offering (IPO) note on KIP REIT.

Yet, KIP REIT’s performance has so far failed to impress investors. The REIT has been trading between 88 sen and 98 sen — below its IPO price of RM1. It closed at 93 sen last Friday, giving it a market capitalisation of RM469.93 million. In contrast, the FBM KLCI has gained 4.8% during the same period.

The situation leaves Datuk Chew Lak Seong and Datuk Eric Ong Kook Liong — the two promoters of KIP REIT — perplexed.

Chew, who is the managing director of KIP REIT Management Sdn Bhd — which manages the investment trust — believes the problem is that it is still relatively unknown.

“[Prior to KIP REIT Management,] both Ong and I were former colleagues at MBf Property Services Sdn Bhd, and then Tanco Properties Sdn Bhd, where we were part of a team involved in a development known as Bandar Country Homes in Rawang. The concept of country homes was new at the time and the development was located far away from Kuala Lumpur city centre, but it was successful,” the 62-year-old tells The Edge in an interview.

“After our stint at Tanco Properties, we decided to venture out on our own, and with a few partners, we formed Meda Inc Bhd (known for its flagship project, The Summit Subang USJ) where I was the managing director of property development from 1993 to 1996. We parted ways with the other partners three years later due to us having different ideas and directions, and formed [privately held] KIP Development Sdn Bhd in 1993.

“KIP stands for Kepong Industrial Park, which was our maiden 120-acre mixed-use development in Sri Damansara, Kuala Lumpur. This was followed by a 128-acre project called Taman Tampoi Indah in Johor. We also acquired a five-acre tract in Masai where we started the KIP Mart concept, which is a hybrid of the traditional fresh produce market and dry retail lots.

“When the concept proved successful in Masai and Tampoi, we ventured into other areas such as Kota Tinggi, Melaka and Senawang, Negeri Sembilan. Then, we acquired one property called Bangi Utama Shopping Complex, which is now known as KIP Mall Bangi. We decided to spin off our retail assets into a separate REIT and the rest is history.”

Ong, 57, who is the executive director of KIP REIT Management, says the company boasts an experienced management team, which will ensure the REIT’s long-term growth.

“Even for community-centric retail marts, you need a good management team to run them. After opening so many malls, we have built up a strong team. For one to start a mall and build up a team is not easy. In fact, there have been a number of developers who have emulated our concept in Johor, but we have been able to operate our marts better,” he says.

A slump in retail sales may also be holding retail REITs like KIP REIT down, but Chew points out that the investment trust’s five KIP Marts — in Tampoi, Kota Tinggi, Masai, Senawang and Melaka — and KIP Mall Bangi focus on mass market retail.

“The KIP Marts and KIP Mall Bangi cater for the local community — low to middle-income consumers. A KIP Mart typically houses 200 to 300 tenants, offering fresh produce, a supermarket, a food court and general merchandise stores that sell fashion apparel, household items and gifts, telecommunications and electrical goods and jewellery,” he says.

“It has everything to meet your daily needs. Even during an economic downturn, people will still come to our malls.”

Ong concurs, noting that KIP Mart tenants comprise small local traders who are “either start-ups or whose brands are not strong enough to go to the bigger malls”.

Due to its resilience to economic downturns, Chew says the REIT is likely to maintain its yield of about 7% in FY2018.

In FP2017, KIP REIT posted revenue of RM26.35 million and net property income of RM17.53 million. The distributable income amounted to RM14.66 million while its total income distribution declared for FP2017 was RM14.74 million or 2.918 sen per unit.

Chew says the REIT distributed 100% of its distributable income to its shareholders in FP2017 and will do the same for FY2018, and thereafter, at least 90% of its distributable income.

“We have also changed our income distribution policy to a quarterly basis from half-yearly [effective March 31, 2017] to give a better upside [to its share price],” he says.

For FY2018, the REIT is looking at a rental growth of 2% to 3%. “We have about 1,000 tenants [spread across the six retail properties], half of which have their tenancies up for renewal. Other income will come from the kiosks and growth in the number of tenants in the newer marts in Melaka and Sendayan,” says Chew.

He notes that KIP REIT’s gearing ratio currently stands at 14%, which gives it the opportunity to undertake borrowings up to 50%.

“This is equivalent to some RM220 million, which we can use for future acquisitions if we come across good properties. We are actively looking for malls similar to KIP Mall Bangi — located in suburban areas that are growing and have a population of 150,000 within a 5km radius. In fact, there are some proposals on the table,” he says, but did not elaborate.

“However, to find a mall that gives a yield equivalent to ours of 7% is not that easy. Another important criterion is that the mall has to have multi-tenants.”

KIP REIT’s plan is to inject at least one new asset a year.

It currently holds the right of first refusal for the acquisition of five properties that are under different stages of completion, parked under KIP Development. They are KIP Mall Kota Warisan in Sepang, KIP Mart Sungai Buloh, KIP Mart Kuantan, KIP Mart Sendayan and KIP Mart Sungai Petani.

“We may inject the properties over the next three to five years as long as they meet the criteria of our acquisition. When [the asset will be injected] is probably after they have been in operation for one year. KIP Mall Kota Warisan will open at the end of this month. Overall occupancy is over 70% now,” says Ong.

“Our ultimate aim is to grow the REIT to RM1 billion in market cap, which can be achieved with the injection [of the five properties],” says Chew. The total asset value of the REIT is RM614 million now.

He also reveals that the manager is currently undertaking an asset enhancement initiative (AEI) at KIP Mall Bangi, which is about 80% occupied.

For FY2018, the REIT will be spending RM4 million on AEI projects.

Chew and Ong have a combined 53.6% stake in KIP REIT. “We have no plans to reduce our stake in the immediate future, but if there are good strategic institutional investors [who want to invest in the REIT], we will consider,” says Chew.

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