KUALA LUMPUR: Sluggish market sentiment has affected the share price performance of the listed real estate investment trusts (REITs) on Bursa Malaysia but industry players are hopeful that the investment instrument can become popular, given the right environment.

Penang state's Chief Minister Tan Sri Dr Koh Tsu Koon (right) and Yasuhiko Sasada looking at some of the company's products.

They said that REITs can be attractive to investors depending on the quantum and regularity of the income and gains from their investment.

According to Axis REIT Managers Bhd chief financial officer Lim Yoon Peng, REIT investors are attracted to the steady and attractive dividend income and potential for appreciation of their unit price.

''Distribution per unit, based on current unit price, translated to between 6.5% and 7.0% yield would appear attractive,'' he said.

In order for the quantum of income to meet the acceptable rate, REITs should perform within, or surpass, market consensus and the annual return must be sustainable to meet obligations for dividend payout.

Lim Yoon Peng.

''One of the ways to ensure REITs are able to meet their earnings projections is to strengthen and expand their asset base through smart asset acquisitions,'' Lim told StarBiz.

''Instead of keeping to their status quo asset profile, REIT managers should constantly improve on their REIT asset base as new acquisitions will mean stronger cash flow and earnings potential. Once the industry starts to grow, we will see new benchmarks and regulations being introduced.''

Lim said between December last year and the first week of April, Axis-REIT's asset value had grown by RM66mil through three new asset acquisitions from RM296mil on the date of its listing on Aug 3, 2005.

''It is also important to have a good spread of quality tenants which will ensure regular rental renewals every one to three years. Of course, having a good spread of assets is also important as a good cushion against a slowdown in a given particular sector,'' he added.

With the big spread of REITable assets in Malaysia, Lim said, the potential for REITs was very good.

''We have such a large supply of commercial properties that can be injected into REITs, including shopping complexes, office buildings, warehouses, hotels and serviced apartments. As long as these properties have attractive and sustainable yields, long leases and high quality tenants, they are REITable.''

Ong Eu Jin.

He said the industry was still in its early stages of growth and it would be most helpful if the infrastructure, including government legislations, were in place to tap the immense potential. ''Clearly defined and enabling government legislations, especially tax reforms such as tax waiver for REIT investors, will attract greater interest for REITs.

''This is especially so in a rising interest rates environment when the spread between return from bank savings and bonds to REIT dividends start to narrow.''

To attract foreign institutional and retail investors, he said, the withholding tax for foreigners should be either reduced or abolished in line with other regional markets.

Presently, Malaysian investors are taxed at their tax bracket while foreigners are taxed at 28% through a withholding tax mechanism.

In Singapore, Reit distribution income to individual investors residing in Singapore, regardless of nationality, are tax exempted while tax on foreign non-individual investors have been reduced to 10% for a five-year period starting from Feb 18, 2005.

Undistributed income of Malaysian REITs is taxed at 28% while in Singapore it is only 20%.

Meanwhile, service providers such as trustees are also eyeing the opportunity to expand their business.

OSK Trustees Bhd chief operating officer Ong Eu Jin said the company, which acted as the trustee for Axis-REIT and UOA-REIT, was eyeing another four REITs in the coming 12-month period.

OSK Trustees has experience in a complete cycle of a REIT, including the pre-listing due diligence and vetting of documents, post-listing acquisition of properties, preparation of annual reports, dividend payouts, withholding tax, execution of tenancies and novations. ''We have also seen different structure of REITs, for example Axis-REIT’s properties are whole buildings while UOA’s are strata-titled units,'' Ong said.

The Securities Commission guidelines provide that all the assets acquired by a REIT must be registered in the name of the trustee and the trustee holds the assets for the unitholders.

Source : The Star 22/4/2006