This article first appeared in The Edge Financial Daily on November 13, 2018

KUALA LUMPUR: Malaysian REIT Managers Association (MRMA) has suggested that the government consider increasing the free float of the proposed airport real estate investment trust (Airport REIT) — the first such REIT in the world — to more than 30% to attract a higher foreign participation in the local capital market.

Increasing the free float will increase the proposed REIT's liquidity and tradability, said MRMA chairman Datuk Jeffrey Ng, who described the REIT as a "powerful way" for the government to securitise and monetise its infrastructure assets, and sees an “exciting time ahead” for the Malaysian REIT industry.

"We are confident that with the right pricing and valuation, the Airport REIT IPO (initial public offering) will garner strong interest from both institutional and retail investors as the REIT is supported by high-quality government-backed assets,” he said in a statement issued by MRMA yesterday. "With [a] sizeable free float, the IPO will attract greater interest of funds."

The statement came after the government proposed the Airport REIT under Budget 2019, with the intention to raise RM4 billion from the disposal of a 30% stake in the REIT. MRMA views the REIT as a strategic way to unlock the country's aviation infrastructure value and create a sustainable funding structure for local airports' future capital expenditure and expansion, while igniting capital market interest.

"Imputing a certain leverage level, the property value for the REIT is estimated to be just below RM20 billion that is to be injected into the proposed REIT," MRMA said, adding the proposal may position the REIT as one of the largest REITs in Malaysia and boost M-REITs' combined property value by 35% to above RM70 billion.

Success of the REIT, it said, will be premised on balancing growth potential vis-à-vis protecting investors against downside risks.

On that note, and given that the REIT’s distributable income will be based on user fees collected by airport operator Malaysia Airports Holdings Bhd (MAHB), MRMA said the REIT’s lease structure should have "a minimal guaranteed income" as protection against downside risks, while allowing unitholders to enjoy the upside growth of user fees derived from both aeronautical revenue and non-aeronautical (duty-free retail, food and beverage offerings, car park management and advertising) revenue.

MRMA is optimistic the REIT would perform well in the long term, given healthy passenger traffic growth seen in the 39 airports MAHB operates in the country, and the International Air Transport Association's forecast that passsenger traffic in Asia-Pacific will grow at a compounded annual growth rate of 4.8% in the next two decades.

It is also encouraged by the government's statement that projects like hospital and rail infrastructure may be considered for similar funding and investment structures, which it said "bodes well” for Putrajaya’s plan to raise private sector involvement in such industries and alleviate its burden to fund capital-intensive projects.