KUALA LUMPUR (July 22): The Securities Commission Malaysia’s (SC) proposed changes to the guidelines on real estate investment trusts (REITs), are generally positive for the industry, says RAM Rating Services Bhd.
In a statement today, the rating agency said the changes which were outlined in the SC’s July 14 consultation paper will keep enhancing the REIT industry’s oversight, while facilitating its growth.
“Briefly, the 16 proposals are aimed at liberalising permitted activities to expand growth avenues, improving corporate governance and streamlining the post-listing requirements of REITs, with those of other listed entities, “said RAM.
The most notable proposal is one that allows REITs to acquire vacant land and undertake development activities up to a limit of 15% of their enlarged total asset value.
“The added operating flexibility will provide greater latitude in asset allocation, to boost returns amid limited acquisition prospects and compressed yields.
“Nonetheless, we remain cautious of the associated market, execution and construction risks that may introduce earnings volatility to an otherwise stable sector,” said RAM.
The agency said despite the increased risk profile, most REITs are unlikely to trade properties to speculate on capital values.
“Rather, they will allow their capital to be used earlier in the development cycles; development profit, if any, will be retained.
“We also view this as a natural extension of existing REIT activities from just an end purchaser, to enhance their value proposition to unit holders over the longer term,” said RAM Ratings.
RAM said the SC's proposed imposition of a minimum 2-year holding period from completion date, the requirement of unitholders’ approval for property disposals, and a higher minimum stake of 75% (from 50%) should help prevent the REITs from taking on overly risky projects.
This, said RAM, is on top of the proposed cap of 50% on the REITs’ leverage ratios, by removing the option for higher leveraging with their unit holders' consent.
“Ultimately, the extent of the impact will vary according to the REITs’ ability to preserve value for investors, [and] this may be achieved through tighter cost control or the organic growth of their existing properties and the funding structure.The progressive nature of construction billings may also stagger the cashflow impact.
“We believe that REITs with sponsors involved in property development — such as Sunway REIT and Axis REIT — will be better poised to benefit from the liberalisation; those with more diversified portfolios and resilient earnings will be better able to weather the associated earnings volatility in the interim,” said RAM.
RAM’s Head of Structure Finance Ratings Siew Suet Ming said for REITs with ageing assets, the move presents opportunities to rebuild according to their needs that will better fit their strategies and to differentiate themselves.
“The limit on investment in greenfield developments should help maintain the REITs as generators of recurrent income and distinguish them from property-development companies.
"This new proposal will undoubtedly be an added consideration for future REITs, versus the option of setting up a stapled security structure, such as the KLCC Stapled Group,” she said.