Friday 29 Mar 2024
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This article first appeared in The Edge Malaysia Weekly on January 9, 2023 - January 15, 2023

THE total value of acquisitions made by real estate investment trusts ­(REITs) reached RM4.67 billion in 2022, surpassing the RM3.82 billion and RM1.97 billion recorded in 2021 and 2020 respectively. The increase was in line with the overall improvement in the property market as the country began its transition to the endemic phase of Covid-19, say property experts.

Based on enquiries received, consultation provided and industry news, market experts believe the total value of acquisitions made by REITs in 2023 could top the 2022 figure.

Siva Shanker, CEO of real estate agency at Rahim & Co International Sdn Bhd, expects 2023 to be better for the REIT sector in terms of transaction volume and value as the economy has stabilised, given that the Covid-19 pandemic is over and corporate results in 3Q2022 showed an improvement.

“These positive sentiments are expected to carry through into 2023. Moreover, the political situation is stable,” Siva tells The Edge.

Laurelcap Sdn Bhd executive director Stanley Toh concurs, noting that the total acquisition value this year could surpass that of 2022. Toh warns of downside risk, however, flagging more interest rate hikes in 2023.

New asset classes likely to be injected into REIT portfolios

Real estate experts say while transactions in 2022 were heavily focused on retail, industrial and healthcare assets, 2023 is likely to see new asset classes added to the portfolios of REITs. These include data centres, education assets, workers’ accommodation and assisted living facilities.

“Industrial assets will continue to be the darling of the year. The focus will be on built-to-suit assets to be injected into the REITs,” says Siva.

He also believes Grade A malls will continue to be attractive while hospitality assets will be back in focus as the worst is over for the industry.

Toh sees industrial, retail, healthcare and hospitality assets being sought after in 2023. “This will be mainly driven by robust consumer spending, the surge in post-pandemic travel and the reopening of the economy.”

He projects that the first two quarters of 2023 will set the tone for the year ahead as the impact from periodic interest rate hikes by the central bank unfolds. He remains cautious as the rate hikes could also mean higher finance costs that may hit the valuations of assets.

For Nabeel Hussain, deputy managing director of Savills Malaysia, property segments that will continue to attract interest include data centres, logistics facilities, healthcare assets, student housing, and assisted and senior living facilities.

New listings of REITs are also anticipated this year.

“Family offices or corporations that own clusters of properties that are performing well will monetise the assets for a steady income stream by injecting them into a REIT. There are several asset owners who are at various stages of discussions in view of a REIT exercise,” says Siva.

Industrial assets led the way in 2022

Laurelcap’s Toh tells The Edge that in 2022, the acquisition of industrial assets led the way in terms of asset class. This was followed by retail malls and healthcare assets to a lesser extent. He points out that of the total acquisition value of RM4.67 billion, the bulk of it — or RM3.19 billion — involved retail assets.

Toh observes that during the economic recovery, some developers took the opportunity to monetise their real estate assets by injecting them into a REIT. At the same time, REIT managers took advantage of the good deals in the market as some businesses were affected by the pandemic. “With the rise in interest rates, we saw property owners selling the assets to a REIT and leasing them back,” he adds.

Amid the oversupply in the office space, transactions involving office assets were clearly absent in 2022. Rahim & Co’s Siva says it is likely that office assets will not be the preferred asset choice of REITs for the next couple of years, but he notes that there are exceptions.

“Office assets will be off the radar screens for a while. However, good cluster assets such as in Bangsar South and KL Sentral continue to enjoy good yields and could draw investor interest,” he notes.

Toh points out that office REITs did not perform well in 2022 because some tenants either did not renew their leases or moved to newer buildings. “We will see more vacant units in older buildings adding to the vacancy rate as newer Grade A buildings in the KL city centre and fringe have been completed and are open for occupancy,” he says.

Nevertheless, Toh cites KLCCP Stapled Group’s office buildings in the KL city centre, which has been performing well, having recorded full occupancy and an increase in net property income of about 17% between 2021 and 2022. He notes that the majority of its tenants are either Petroliam Nasional Bhd (Petronas) or companies related to the national oil firm.

RPT deals made up bulk of 2022 acquisitions

Savills Malaysia’s Nabeel observes that since 2019, the bulk of the acquisitions made by REITs were related party transactions (RPTs). Non-RPT deals made up less than 15% of the total value of acquisitions, he says.

“Excluding RPT deals, the total value of acquisitions ranged between RM200 million and RM300 million from 2019 to 2021, with this number recovering to around RM500 million in 2022,” he says, adding that early indications point to the figure exceeding RM1 billion in 2023, although much depends on a number of factors.

A significant industrial asset acquisition last year, which was a non-RPT deal, was Axis REIT’s purchase of a 1.55 million sq ft logistics warehouse facility in Port of Tanjung Pelepas (PTP), Johor, for RM390 million from Singapore-based Equalbase PTP Sdn Bhd. Interestingly, this was the largest industrial building transaction in 2022 and the REIT’s biggest purchase so far.

The acquisition of the former Western Digital industrial asset in Sungei Way, Petaling Jaya, by Sunway REIT for RM60.05 million is another example of a non-RPT deal.

Two major retail asset acquisitions executed last year that were RPTs were the sale of Pavilion Bukit Jalil in Kuala Lumpur and Queensbay Mall in Penang. Pavilion REIT bought the year-old Pavilion Bukit Jalil from its sponsor Malton Bhd for RM2.2 billion, making it the single largest retail REIT exercise in nearly a decade.

In Penang, CapitaLand Malaysia Trust bought 91.8% of the total strata floor area of the retail parcels in Queensbay Mall from parties related to CapitaLand Investment Ltd for RM990.5 million.

Referring to tenancies at shopping complexes, Nabeel points out that during the pandemic, many landlords were focused on supporting their tenants through the crisis and preserving cash flow was a prudent strategy.

“It was difficult to fairly assess assets for acquisition as income streams for the assets could be quite uncertain and the ‘bottom’ was difficult to identify. However, since the transition to the endemic phase, the worst appears to be over and some landlords have even been able to increase rents,” he notes.

Last year, the industry also saw healthcare assets being transacted. In an RPT, ­Al-‘Aqar Healthcare REIT purchased three assets — the TMC Healthcare Centre building in Taiping, Perak; KPJ Seremban Specialist Hospital; and the Pasir Gudang Hospital in Johor — from KPJ Healthcare Bhd for a combined value of RM192 million.

Acknowledging that many of the transactions last year were RPTs, Siva says an advantage of such a deal involving REITs is the sponsor’s ability to identify assets or entities that best suit the REIT and focus on building them.

Meanwhile, disposals made by REITs in 2022 stood at RM492 million. Sunway REIT sold Sunway Medical Centre Towers A and B to Sunway Bhd for RM430 million. The REIT had bought the asset from Sunway in 2012. AmFIRST REIT sold Menara AmFirst to Forever Backup Sdn Bhd for RM62 million.

 

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