April 2011 issue 11

COVER STORYLiquid Returns From Property

POLICYMalaysian Government Spearheads Innovation

SECTOR FOCUSUnlocking the MRT’s Potential

Kuala Lumpur Skyline

FACILITATING & PROMOTING INVESTMENT FOR MALAYSIAN REAL ESTATE | www.malaysiapropertyinc.com

LIQUID RETURNS FROM PROPERTYMalaysian REIT market enjoys stable yields

by Afiq Syarifuddin & Hazrul Izwan

The 2007 financial crisis in the United States is still affecting the Western and European markets this has seen investors around the world scrambling for investment vehicles that can generate attractive returns without them having to take colossal risks.

One of these vehicles is the real estate investment trust (REIT), which is featuring prominently on investors’ radars. As a listed vehicle managed by real estate professionals, REITs explore a portfolio of income-generating properties and distribute net returns on a regular basis to provide stable yields for unit holders.

(continued next page)

WHAT DOES REIT MEAN?REIT is the accepted acronym for Real Estate Investment Trust. REIT companies generally invest,

manage and distribute net profit through dividend payback to investors.

A REIT is traded on Bursa Malaysia with the same ease of buy and sell as a normal equity. REITs don’t just rent out and manage properties in their portfolio. A high performance REIT is developed by injecting new acquisitions into the portfolio. In some countries, REITs jointly develop property projects with other entities. This will provide even higher potential returns compared with low to moderate risk investment instruments. A REIT is a good alternative asset

class for those looking for dividend-yielding investments.

INVESTOR PREFERENCESCapitalising On Asia Pacific

CEO’S SPACE Let’s Talk About Our Real Estate

NEWS FLASHMore Demands For Hotel

IN A NUTSHELLStable Growth For Malaysian Real Estate

COVER STORY 2

(from previous page)

REITs first made an entry into Malaysia in the late 1980s with the advent of Arab-Malaysian Property Trust. At that point in time, Malaysia had established the framework for real estate trust funds under a set of guidelines called Listed Property Trusts (LPTs). However, due to the lack of tax transparency and fund liquidity, LPTs developed relatively slowly in Malaysia and went into relative obscurity until the Securities Commision revised the LPT rules as relaunched them under the newly formed REIT Guidelines in 2005.

With the new guidelines in place, the Malaysian REIT (M-REIT) market is expanded from 1 REIT in August 2005 to 13 currently and is expected to grow further over time. However, it is still considered small compared with other REIT markets in the region, with only 13 players a market capitalization of RM10 Billion. Of this, 10 are conventional, while three others are Shariah-compliant.

Associate Professor Sr. Dr. Ting Kien Hwa, Head of Centre for Real Estate Research Universiti Teknologi Mara, told Property Quotient that the M-REIT market is expected to further consolidated this year. Last year, two large capital M-REITs, namely CapitaMalls Malaysia Trust (CMMT) and Sunway REIT (SunREIT), were listed with a market capitalisation of nearly RM 5 billion and this added depth and

much needed liquidity to the market with appraised property values of RM3.7 billion and RM2.1 billion respectively.

However, there is medium-term pressure on interest rates to go up, resulting in a narrower spread between risk free Government bond and REIT yields. REITs across the board are expected to be affected, which in turn could affect REIT returns on their arbitrage on borrowing.

Having said that, Ting mentioned that the M-REIT yield gap is still attractive, generally producing higher returns at 7% compared with bonds at 3%. This reflects that M-REITs generally still have

room for price appreciation. Moreover, M-REITs also represent variety through sector-specific REIT companies and diversified REIT companies.

Even though M-REIT is traded freely in the stock market, it behaves in such a way that there is little fluctuation in its price. Only in the event of a market crash or sudden interest rise would the price decrease as evidenced in 2008.

Although the bulk of M-REITs are conventional in nature, some companies have decided to capitalise on the current market desire for Islamic products and established Shariah-compliant REITs.

The first company to convert to a Shariah-compliant REIT was AxisREIT Managers Berhad. Axis-REIT was listed in 2005 as a conventional REIT as at the

a Shariah-compliant REIT was relatively easy as being an Office /Industrial REIT its tenants complied with the ruling tjhat they should not indulge in no haram (illegitimate) activities. This would be more difficult to maintain should the portfolio contain retail and hospitality assets.

A common misconception of Axis-REIT is that it focuses on injecting single-tenant properties. The truth, however, is that single tenant assets tend to comprise around 50% of its assets under management. The balances are multi- tenanted assets which allow a blend of organic growth coupled with long leases. It portfolio strength is derived from three main factors: strategic location, tenant profile and enhanced value of the buildings.(continued next page)

Figure 2: Asset Value in RM million as at 31 December 2010

Sunway REIT

CMMT

Starhill REIT

AmFirst REIT

Al-Aqar KPJ REIT

Axis REIT

Al-Hadharah Bousted REIT

Quill Capita Trust

Hektar REIT

AmanahRaya REIT

Tower REIT

UOA REIT

Atrium REIT

Source: Bloomberg, MPI Research

time the Islamic REIT guidelines were not published yet. By virtue of converting into Malaysia’s largest Shariah-compliant real estate investment trust, Axis-REIT has now widened its investor base to include conventional as well as Shariah-based funds.

Other sector-specific Islamic M-REITs in the market are Al-Aqar KPJ and Al-Hadharah Boustead, which focus on healthcare and plantation respectively as their key portfolios.

AxisREIT Manager Berhad’s chief executive officer Stewart LaBrooy said that Axis-REIT success in converting into

0 500

1000

1500

2000

2,50

0

3,00

0

3,50

0

(RM

’m)

Shariah-compliant REIT market share in Malaysia

19%

REIT Dividend Per Unit (sen)

Sunway REIT 6.70 CMMT 3.40 Starhill REIT 3.29 AmFirst REIT 4.81 Al-Aqar KPJ REIT 4.43 Axis REIT 4.30 Al-Hadharah REIT 6.20 Quill Capita Trust 4.18 Hektar REIT 10.30 AmanahRaya REIT 1.67 Tower REIT 5.50 UOA REIT 2.47 Atrium REIT 2.20 Source: Bursa Malaysia

Figure 1: Dividend Per Unit (sen) as at 31 December 2010

3,729

2,185

1,619

1,044

1,011

908

866

818

777

748

599

519

182

COVER STORY 3

(from previous page)

For example, during the acquisition of Nestle House (presently known as Quattro West) in Petaling Jaya, a major risk identified was a short-term lease agreement with the property’s single tenant. However, the six-storey building with one basement car park, which commands a total of 104,392 sq feet, is strategically located on Persiaran Barat, Petaling Jaya, adjacent to PJ Hilton Hotel and the busy commercial precinct of Petaling Jaya, with excellent connectivity to two LRT stations and major bus stop and close to ample amenities within the neighbourhood.

When the tenant left in November 2009 the Manager decided to realise this potential and embarked on a major refurbishment exercise aimed at enhancing value and improving building efficiency by incorporating green building technologies, upgrading the M&E facilities and giving the building a modern facelift. Within three months of reopening, the occupancy of the building was 80% and rents were 25% higher.

Similar to conventional REITs, Shariah-compliant REITs are given tax incentives and trade fairly in the marketplace. Interestingly, the appeal lies in thier Shariah compliant nature, which clearly

assists local pension funds’ mandate to invest in Shariah-compliant portfolios.

Asked if Axis-REIT plans to expand its portfolio in other jurisdictations, LaBrooy reiterated that Axis-REIT will remain a Malaysia-centric REIT, with no plans to venture for assets outside the country. However, he concurs that the Shariah-compliant model is not restricted to single country asset models.

Ting said interest in M-REITs could be spurred further through active property acquisitions by the REIT Management companies, thus increasing their l iquidity and visibility thereby attracting foreign investors. He added that opportunities arising from mergers and acquisitions between REITs could also be an exciting development to incite investor appetite.

Ting also mentioned that in the US, even jails are listed in the REIT market through Private Finance Initiatives (PFI). Thus, an introduction of infrastructure-REITs could allow highways, airports, railways and other income-generating infrastructure to be listed.

There is also some talk of foreign Islamic REIT listings coming in from the Middle East, which could positively benefit M-REIT through international property exposure. Being a country that has established a Shariah-compliant framework, Malaysia definitely has a better platform compared with its neighbours.

REIT returns can also be improved through internal growth and external growth efforts undertaken by REIT managers. Internal growth can be achived through rental income growth,

controls over outgoings, enhancement and improvement to property value by way of renovation and refurbishment, which will increase earnings per share (EPS) and be translated to higher capital value (CV).

Meanwhile, external growth can be achieved through acquisition of more yield-accretive properties essentially aimed at improving the property portfolio through diversification advantage and growth in the funds from operation (FFO).

Adenan Md Yusof, chief operating officer of AmanahRaya REIT (ARREIT) pointed out his concern that Malaysia must further decrease its tax rates on REIT incomes to bring them in line with charges imposed by its neighbor, Singapore. In addition, fine-tuning the tax regime for foreign institutional investors can make M-REIT more attractive compared to similarly-taxed REIT markets such as Japan, Thailand and South Korea.

“M-REIT yield gap is still attractive as it generally produces a higher yield at 7% compared to bonds at 3%. This reflects that M-REITs generally still have space for price appreciation.”

Associate Professor Sr. Dr. Ting Kien Hwa, Head of Centre for Real Estate Research (CORE), Universiti Teknologi Mara (UiTM)

“Shariah-compliant model can be extrapolated to other cities.”

Stewart LaBrooy, Chief Executive Officer AxisREIT Manager

Nonetheless, investing in M-REIT is reasonably profitable as the market capitalisation is still small compared with other more mature markets, allowing more room for development. This also ensures that returns generated are comensurate with the risks involved.

Ting observed that the current trend in the market as reflected in share movements is that investors prefer sector-specific REITs compared with diversified REITs. This is because the former perform better, as they provide better exposure due to being sector-focused.

(continued next page)

COVER STORY 4

Figure 3: Market Capitalisation of Individual REIT markets in Asia Pacific as at 31 Dec 2010

(from previous page)

H i s t o r i c a l l y, a c r o s s t h e b o a r d diversification, while reducing risk exposure, also generates smaller returns compared with sector-specific REITs.

As mentioned earlier, M-REIT is bundled with tax incentives to help spur the market. M-REIT will not be taxed should the distributed income be more than 90% of net income. Moreover, the unit holders are only imposed a one time 10% withholding tax on dividends and need not pay personal income tax on the earnings after receiving the dividend cheque. M-REIT can also benefit institutional investors who wish to have exposure to property by providing access to direct ownership through ownership of units.

M-REIT boasts excellent risk adjusted returns as evidenced by its very attractive yield and REIT Managers’ good corporate governance practices. Furthermore, the structure and regulatory framework of M-REITs is still not as complicated as REITs from other jurisdictions, which are laced with riskier assets such as residential properties and mortgage-backed securities.

Being a relatively new market, M-REIT provides the investor an exposure to the high growth potential in Malaysia and Asia. This is largely due to Funds managed by American, Korean, European and Japanese Fund Managers are looking at REITs as an investment opportunities in Emerging Asian market as local currencies are stable and yields are better than those in mature economies like Korean and Japan.

For a brighter M-REIT future, Ting is of the opinion that with better market transparency and superior corporate governance, it will be only a matter of time before M-REIT starts to appeal to international institutional investors. He concluded that the availability of a property index and REIT index would allow performance benchmarking across the Asia Pacific thus facilitating investment decisions.

“Malaysia must further decrease its tax rates on REIT incomes, bringing them in line with charges imposed by its neighbor, Singapore. In addition, fine-tuning tax regime for foreign institutional investors can make M-REIT more attractive compared to similarly-taxed REIT markets such as Japan, Thailand and South Korea.”

Adenan Md Yusof, Chief Operation Officer, AmanahRaya REIT

US$’billion

80

70

60

50

40

30

20

10

0 Aus

tral

ia

Japa

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Sing

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Hon

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Mal

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7

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2

1

0

US$’billion

Source: Bloomberg, APREA Research

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WHO IS THE FUND SUITABLE

FOR? Investors who seek income and capital

appreciation, and plan to hold their investments for the medium to long

term.

Investors who are seeking to benefit from investing in real estate across a wide range of sectors and countries through tradable, equity securities.

A Fund tends to outperform:

• In a relatively low interest rate environment, as yields on REITs may be appealing in comparison to yields on other asset classes.

• In an environment of gradually rising rates, as REITs can generally benefit over the long run and can provide a hedge against inflation.

A Fund tends to underperform:

• In periods of rapidly rising inflation or increasing interest rates, REIT yields may not be as attractive as other asset classes.

M-REIT can also benefit institutional investors through the transfer of responsibilities such as

conducting title searches and property due-diligences to the

POLICY 5

The establishment of the Special Innovation Unit (Unit Inovasi Khas or UNIK) under the Prime Minister’s Office to promote innovation in the country in August last year has seen a major push towards forging relations between institutes undertaking research on feasible projects and the private sector that can bring them to fruition.

Innovation has been identified by the Government as the main mechanism to attain the objectives of the New Economic Model.

After eight months of research and discussion, UNIK identified 22 ecosystem and wealth creation initiatives which were launched on April 19. These ventures are but a fraction of many other innovative projects in the pipeline that are expected to attract billions of ringgit in investment and help unearth the nation’s intellectual wealth.

Prime Minister Datuk Seri Najib Tun Abdul Razak described the launch as an “Innovation Lift-off” and added that it was a new direction that would positively impact wealth creation, with spillover effects that would be far-reaching.

“It will enhance the technical and business skills of the entire supply chain. Unlike research and development i n i t i a t i v e s , t h e s e i n n o v a t i o n projects have attracted customers internationally-even before their launch,” he told a media briefing last month.

Malaysia’s academics, research institutes and corporate organisations have long conducted R&D; but while a

portion of them have been translated into commercial success, others have been locked away in filing cabinets and libraries or remain as prototypes in research institutes.

Matching innovation, either big or small, complex or simple, with credible business partners is bound to increase the commercial value and culminate in successful business ventures which can provide investment opportunities and employment and bring profits to the involved parties.

Extrapolating this to the construction and building sectors, innovative s o l u t i o n s c a n i n t r o d u c e n e w technologies, make work more efficient, increase safety standards and help produce new professionals. For this, research and development needs to attain new heights.

The Global Innovation Index (2009-2010) by the European Institute for Business Administration, which evaluates innovation readiness in countries, has ranked Malaysia 28 out of 132 economies

Malaysia is highly ranked in market sophistication with a rank of 5th position, as well as in Business Innovation with a rank of 26th position. The indicators for which Malaysia scored highly are:

• Investor and creditor conditions (ranked 2nd)• Getting credit and protecting investors (1)• Foreign direct investment and technology transfer (8)• Burden of Government regulations (15)• Culture to innovate (16) and • Company spending on R&D (19)

Other indicators that had affected Malaysia’s innovation index include innovation potential (78), creative outputs (44), knowledge creation (34) and researchers in R&D per million population (49).

The high performance countries for innovation are Sweden, Hong Kong, Switzerland and Denmark.

The quest to “innovate” should be a strategy for all sectors of the economy including the building and construction sector especially since globalisation

MALAYSIAN GOVERNMENT SPEARHEADS INNOVATIONWith the goverment focused on embracing “innovation” as the main mechanism to improve Malaysia competitiveness in the near future, K.P Waran looks at how this concept can be adopted by the building and construction sector to spur growth

brings opportunities and pressure for domestic firms in emerging market economies to innovate and improve their competitive position.

In the last decade there has been talk of speeding up the house-building industry, especially with a population that is growing and more foreigners deciding to live under Malaysian skies, but there has not been much progress in this area, with the low and middle income group in certain areas still unable to own homes due to a shortage. Focused research by institutions of higher learning, research institutes, developers and others to overcome the problems faced by the local building industry can help to meet the demand of a buying market and fulfill the aspirations of the Government to have a decent roof over the heads of every citizen and guests who want to make Malaysia their home.

The many innovative ideas that have been floating in the building and construction industry, but have only achieved limited success or have yet to get off the drawing board include using recyclable local materials such as padi husks (which when burnt becomes 95 per cent silica) to make mortar.

There is abundant rice husk in Malaysia and every tonne of padi can produce about 200kg of husk. Experiments have shown that burning the husk into ash under controlled conditions and adding quick-lime (calcium oxide) can produce cement-like quality products. Blocks produced from husks can be strong and yet weigh less than conventional bricks.

(continued next page)

With Malaysia dependent on foreign labour in the construction industry, it is imperative to come up with solutions that can reduce the workforce and save costs as inflationary trends have literally pushed building costs through the roofs of

skyscrapers.

POLICY 6

(from previous page)

Also seen in research papers but yet to make it big in our buildings are bricks made from by-products of the oil palm industry, sophisticated cooling technology for tropical houses and more efficient and cheaper solar panels to power homes and offices.

Malaysian companies, universities and research institutes can take the building and construction sector to new heights if they can hasten research and development into producing more efficient and environmentally-friendly construction materials with a reduced carbon footprint that are suitable for the country’s hot and wet weather.

The local and foreign building industries are also looking for solutions offering exceptional thermal performance, structures which are more resilient and durable, gantries that are more efficient and can be easily dismantled, high performance concrete, wastewater filtration systems that are up to date, holistic plans for green buildings, new concepts for ventilation, sophisticated “smart” systems for automated buildings, concrete recycling systems,

steel-free building materials and many more.

By coming out with innovative solutions for the multitude of processes involved in the building and construction sector, the local industry will not only benefit from the use of these products but will have the opportunity to export the technologies to other countries.

This could spawn factories and manufacturing plants in Malaysia and draw investors to these businesses but also help bring down costs apart from introducing new innovations that are more efficient.

Such new innovations, apart from spurring the industry, will also help set the tone for universities to emerge from their silo mentality and tear down the walls that limit their outlook, encouraging professors and teaching staff to embrace an entrepreneurial bent instead of merely publishing papers and securing research grants.

The building and construction industry, by embracing innovation as its mantra can help promote cutting-edge technology which is essential towards maintaining global competitiveness.

Figure 4: Global Innovation Index Framework

The Government, by establishing the Malaysia Innovation Agency to centralise all innovation activities, and drafting the National Innovation Policy to provide the framework to become more responsive and simplify guidelines for innovation needs, has shown its commitment towards pushing “innovation” to the forefront of its agenda to further spur the economy.

Developers, by working hand in hand with research institutes and universities, can play an important role to be on track with the Government’s efforts. Currently, globalisation has created a business environment in which a static business model is irrelevant, since the global economy changes so rapidly in so many complex ways today that innovation has to be part of the industry’s DNA from day one.

As Prime Minister Dato Seri Najib Tun Abdul Razak said recently on the topic of innovation: “The Government can provide the playground and facilities, but ultimately, you (the private sector) are the ones who have to play the game. You are the ones who have to win the battles and bring home the revenue”.

Global Innovation Index

Innovation Input Innovation Output

Science Output

Creative Output

InstitutionsHuman Capacity

ICT & Uptake of Infrastructure

Market Sophistications

Business Sophistications

Knowledge Creations

Knowledge Applications

Exports & Employment

Creative Output

Benefits to Social Welfare

Political Environment

Regulatory Environment

Conditions for Business

provided by Public

Institutions

Investment in Education

Quality of Educational Information

Innovation Potential

Investors & Creditors Conditions

Access to Private Credit

Innovation Environment

in Firms

Innovation Ecosystem

Openess to Foreign & Domestic

Competition

ICT Infrastructure

GeneralInfrastructure

Uptake & Use of

Infrastructure

Source: UNIK

UNLOCKING THE MRT’S POTENTIALThe government aims to capitalise on value appreciation along the rail route to finance the project

SECTOR FOCUS 7

by Afiq Syarifuddin

If the Government’s aspiration to turn Kuala Lumpur into one of the world’s top 20 cities in terms of economic growth and liveability is to become a reality within the next decade, connectivity within the city and its environs has to be considerably improved.

The impetus to address the current congestion problems and improve connectivity in Greater Kuala Lumpur with a view to directing more skilled workers into the city centre would be an integrated public transportation f r a m e w o r k , s a i d S u r u h a n j a y a Pengangkutan Awam Darat (SPAD) chief executive officer Mohd Nur Ismal Mohamad Kamal.

Speaking on the topic “Greater Kuala Lumpur-Klang Valley Mass Rapid Transit (MRT) and Property Play” organised bythe Malaysian chapter of the International Real Estate Federation (Fiabci), Mohd Nur said the best solution to Greater Kuala Lumpur’s (GKL) transportation needs would be the Mass Rapid Transit (MRT) being undertaken by Syarikat Prasarana Negara Berhad (Prasarana).

Source: Suruhanjaya Pengangkutan Awam Darat (SPAD)

Under the Malaysian Government’s Economic Transformation Plan, GKL is designed to be the country’s most important investment destination. Currently the area is the largest contributor to gross national income per capita level, leading seven times against Johor Baru, the next largest urban centre.

“We currently do not have enough public transport coverage and there are pockets of areas that are under-served. The naysayers may argue that MRT is not the only solution, but we would like to stress that it is the most important mechanism in addressing the problem.”

“Actually, to handle 25,000 people per hour within a radius of 30km, the MRT is the only viable solution. The goal is to get 50% of the city’s population to use public transport,” Mohd Nur pointed out. SPAD is the authority that supervises the country’s public transportation systems, including rail, bus and taxi services.

For example, among the areas that are currently under-served is the Sungai Buloh-Kajang stretch, which houses a population of 1.2 million, of which 400,000 commute to the city centre daily in private vehicles or public transport.

“The completion of the MRT along this stretch, and others, will make convenient public transportation available to these commuters as well as the rest of the population, reducing the number of private cars on the road and reducing congestion,” Mohd Nur added.

While many see the advantage of the MRT project, it has received some brickbats from the public. Many have cited the high cost of the project (somehave predicted that it could balloon up to RM50 billion or USD11.5 billion) as one reason for it to be put on hold.

(continued next page)

Figure 5: Sungai Buloh - Kajang (SBK) MRT Line

SECTOR FOCUS 8

“If you’re looking to handle 25,000 people per hour within a radius of 30km, MRT is the only viable solution. The goal is to get 50% of the city’s population to use public transport.”

Mohd Nur Ismal KamalChief Executive Officer, Suruhanjaya Pengankutan Awam Darat (SPAD)(Land Public Transport Commision)

Mohd Nur said with the increasing demand for property these days,there is tremendous potential locked in government land located along the proposed alignment.

“TOD will unlock the value of sites owned by the government and provide the means to finance the project.”

The general plan is for SPAD to identify available government land located along the proposed alignment and station, and hand it over to Prasarana.

Mohd Nur clarified, however, that this does not mean that Prasarana is going to become a property development company.

“Prasarana is not supposed to develop, put in funds or construct property, thereby exposing the government unnecessarily to major risk. Its role will be to work with real estate corporations that will develop the land, with the

(from previous page)

Mohd Nur said one of the strategies for mitigating the cost of the project would be to employ the Transit-Oriented Development, or TOD, strategy, which essentially means capitalising on the anticipated appreciation in land value, known as ‘upside’ in property terms, for areas located along the MRT’s alignment.

“TOD is a concept many countries have adopted to offset the cost of constructing their MRT lines. Basically, it involves capturing the upside on property value near the transit areas. It is important for the government to capture this upside as previously, any upside from transit-centric developments in Malaysia have only been enjoyed by the private sector. The public sector hardly benefited at all,” he commented.

potential profits to be shared. Prasarana’s portion of the profits will be channelled back to resolve the construction costs of the MRT.”

“Initially, it won’t be as good as the TOD applied in Hong Kong and London, but there will still be major upside that can be utilised by the government,” Mohd Nur pointed out.

The MRT plan is on public display until 14 May 2011. SPAD has been holding public opinion sessions to collect and collate comments and concerns from various stakeholders to assist the Government in planning the final alignment of the proposed MRT.

Mohd Nur said while the government is open to listening to the rakyat’s views, the project itself will go on as GKL is urgently in need of the MRT. The first phase of the project is expected to kick off in the third quarter of this year and scheduled for completion in 2016.

Total Elevated Underground

Length in KM 51 41.5 9.5 Number of Stations 35 27 8 Number of Park & Rides 13 - -

Local Council MPS MBSA MBPJ DBKL MPKJ

Length in KM 0.8 5.5 7.7 23.1 13.7 Number of Stations 1 4 4 17 9

Notes: Proposed station names are temporary only subjected to approval by SPAD and related goverment agencies

Legend: MPS - Majlis Perbandaran Selayang MBSA - Majlis Bandaraya Shah Alam MBPJ - Majlis Bandaraya Petaling Jaya DBKL - Dewan Bandaraya Kuala Lumpur MPKj - Majlis Perbandaran Kajang

Source: Suruhanjaya Pengangkutan Awam Darat (SPAD)

Figure 6: Total Length of Sungai Buloh - Kajang (SBK) MRT Line

INVESTOR PREFERENCE 9

CAPITALISING ON THE ASIA PACIFICby Chan Tze Wee

The Asia Pacific region’s high growth figures are undoubtedly a magnet for keen investors, but those aiming to park funds in this market must take time to become thoroughly acquainted with every aspect of its unique investment landscape and do their homework before coming in.

In the recent Asia Pacific Real Estate Association Property Leaders Forum 2011, one of the sessions covered the hot topic of investibility in Asian markets. A panel of experienced and well-immersed executives discussed their Asian forays from the institutional investors’ point of view and stated that while the Asia Pacific is an attractive market, investors must pay attention to the risks associated and study the market to maximise their returns.

Over the next decade, the Asia Pacific region’s share of institutional grade commercial real estate is predicted to grow dramatically.

Prudential Real Estate Investors forecasts the region to grow at a rate of 11% per annum, increasing its current share of global commercial real estate from 25.8% to 36.7%. In value terms, this is a shift from US$6.2billion to US$17.5billion.

This growth comes at the expense of Europe and the North American region comprising the United States and Canada. These regions currently cover 36% and 30.5% of the global institutional grade real estate market respectively.

The panel session on “Asia’s investibility compared to other regions” was moderated by Joel Rothstein, Partner at Paul, Hastings, Janofsky and Walker LLP. The panel speakers comprised David Dickinson (Managing Director and Global Head of Research and Strategy Planning, GIC Real Estate Private Limited), Jennifer Johnstone Kaiser (Principal, Head of Real Estate, Asia Pacific, Mercer) and Philip Levinson (Managing Director, Investor Relations and Business Development Group, The Blackstone Group).

The business case for an international investment strategy in real estate falls on having accessible and usable updated information on size and growth potential of the market, said the panel. For investors, finding their way into and around a semi-transparent market is undoubtedly high on their checklist of challenges. Their advantage will ultimately lie in their understanding of the local market, strongly driven by having either superior access to information or strong local partners.

The panel said that increased accessibility to country-specific real estate data by the international audience cannot be underestimated. Access to data allows for comparison and benchmarking between different markets, monitoring of the health of individual markets and most importantly, creates a base for analysis and forecasting.

Having said that, they acknowledged that there is no access to publicly available real estate information in certain Asian markets and said the lack of access to data can ultimately be detrimental to the potential in untapped markets. In the words of a private equity fund manager, “If I can spend six months fund-raising and the same amount of time researching opaque markets because it takes that much longer to gather information, I’d rather raise funds.” (continued next page)

Source: EIU, IMF, Prudential Real Estate Investors Research

Figure 7: Estimated Size of Institutional Grade Real Estate in Asia Pacific by Country (US$b), 2010 3,000

2,500

2,000

1,500

1,000

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One of this forum’s panel sessions saw the participation of Mr Stewart Labrooy, Chief

Executive Officer and Executive Director of Axis REIT Managers Berhad. This session discussed “Non-China Emerging Markets” and the risk premiums attached to emerging markets other than

China.

In PERE’s 2010 Global Awards, sovereign wealth funds China Investment Corporation (CIC)

and National Pension Service of Korea featured as the Top 3 LPs of the year. Taking CIC as a case

study, its global investment portfolio comprised a 6%

allocation to alternative assets including real estate. Notably, a number of CIC’s investments

into real estate were significant direct transactions. As of 25

April 2011, the Financial Times reported a fresh injection of between US$100billion and

US$200billion funds from the Chinese government into CIC’s

coffers, with US$110billion fully allocated for offshore

investments.

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81 73 63 39 17

INVESTOR PREFERENCE 10

(from previous page)The presence of multinational firms in new markets plays a big part in importing best practices for data collection and performance tracking. As sizeable sovereign wealth funds expand their real estate portfolio both in asset allocation size and location strategy, this also increases the flow of information on real estate transactions and valuations.

Differences on investing in developing Asia Pacific markets versus other developed markets

• Work around data availability in low transparency markets

• Recognise a different competitive environment. Sophisticated markets, or high transparency markets, are an open playing field where international firms benefit from size and scale. In low transparency markets, local industry players have the advantage of local knowledge.

• Assess credibility and reliability of local partners

• Prioritise on manager skills as this affects research outcome of markets, for example, accuracy of risk/return premiums

• C o n s i d e r b r o a d e r i n ve s t m e n t objectives/measurables apart from yield returns as internal rate of return for these markets is affected by higher risk premiums

• Understand dynamics of local rules and regulations, for example, tax advantages in place for local companies and domestic institutions

• Investors with aggressive growth strategies need to look for niche areas and less competitive segments in local markets – these areas have higher risk premiums attached, coupled with a lower presence of local players

Learnings for foreign fund managers tapping into developing Asia Pacific markets

• Expect to take more time to research these markets

• Keep learning about the local market so that when the opportunity is right, you are ready to transact

• Acknowledge the imperative to have a presence in Greater Asia, moving into more untapped South East Asian markets, simply because of growth potential

• Look beyond investable stock – opportunities in these markets could be more value-added or opportunistic

• Look at alternative sources of information eg. local REIT market data strongly contributes to data transparency in these markets

On the Malaysian institutional investment front, the

Employees’ Provident Fund’s (EPF) actual exposure to real

estate investments is currently at 2%, with a 5% strategic

asset allocation target over an undefined period. Other local sovereign wealth funds such as KWAP (Kumpulan Wang Persaraan, or Retirement

Fund Incorporated and LTAT (Lembaga Tabung Angkatan

Tentera, or Armed Forces Fund Board) have previously invested

together with EPF in club deals, both in direct domestic and international real estate

acquisitions.

Figure 8: Jones Lang Lasalle Global Real Estate Transparency Index 2010: Malaysia Ranks 25 out of 81

Source: Jones Lang Lasalle

LET’S TALK ABOUT OUR REAL ESTATE

CEO’S SPACE 11

by Kumar Tharmalingam

One particular fund manager, an American Japanese fund which had invested in Singapore and had an Asian base in Singapore knew nothing of the investment opportunities in Malaysia other than what was garnered from Government pronouncements on the Iskandar region and Penang, and a little bit on the Economic Transformation Programme and the Klang Valley. Local information is everywhere and almost every home owner in Malaysia is an expert on some aspects of Malaysian real estate. We have valuation firms providing data and analysis but they do not seem to have a market outside the country since what is published is usually a few paragraphs in the dailies or weeklies.

Our main issue is that there is a paucity of investment in large chunk real estate by large international funds. Any time we get some we do make a noise but it is only heard locally so the foreign media have no knowledge. In countries like

MPI has had many Fund Managers come to our office seeking information on investment opportunities and data on property transactions that are current. It is not very encouraging to discover that investment funds from Japan, Korea, Hong Kong and Singapore have so little information on real estate in Malaysia.

Hong Kong or Singapore every agency disseminates information about real estate to the media and to the embassies all over the world about the latest trends in the property market. Thailand uses the Tourism Ministry to also publish trends and transactions and recent high profile investments into the country, especially in the motor industry.

We have lots of oil and gas and investment corridor information. Investment in the IT industry in Penang is growing, yet this information remains within the state or the company. It is not picked up by any of the Ministries to showcase investments done in the country. Having seen the seamless delivery of investment information in a positive way by other countries, there must be an opportunity for Malaysia to do the same. Information not only has to be topical but also in-depth and disseminated through a dedicated delivery system.

MORE DEMAND FOR HOTELS More international hospitality brands setting up business to match growing demand

by Afiq Syarifuddin

with the brand arising from its hotel operations in the Middle East, India and China has helped to fill up hotel rooms in other countries, too. The group saw revenue per available room for its Malaysian operation grow by a tenth in 2010 compared with the previous year.

Marriott has not discounted the possibility of operating the luxurious Bulgari Hotels & Resorts brand in Malaysia. Smith said such a hotel would fit well into a market that has a niche clientele and easy air access. However, location would be a paramount consideration and along with it, the design and joint-venture partner for the endeavour.

Bulgari Hotels & Resorts was introduced in 2001 and is a joint venture between jeweller and luxury goods retailer Bulgari SPA and the Luxury Group – a division of Marriott International – that also manages the the Ritz-Carlton hotels.

Meanwhile, Swiss-Garden International Hotels, Resorts & Inns will be opening five new hotels in Malaysia within the next two to three years. The hotels will be in Butterworth, Penang; Cameron Highlands;Senai in Johor; Kota Kinabalu in Sabah; and Kuantan, Pahang.

The hospitality sector in Malaysia is bustling with activity as more international brand hotels set up business in Malaysia due to increasing demand for services above the four-star category .

Hotel management company Marriott International Inc, which operates the Marriott, Renaissance and Ritz Carlton brands, is scheduled to open two new hotels in Malaysia by the middle of next year, bringing its total number of hotels here to nine. The two new hotels, one in Johor and another in Sarawak, will see the group increase its room inventory in Malaysia by 400 from about the current 3,000.

Marriott International Inc chief operating officer (COO) for Asia Pacific Craig S Smith mentioned that familiarity

Swiss-Garden International Hotels, Resorts & Inns central region group general manager Rayan Komatt said the demand for accommodation is growing in Kuala Lumpur be it for corporate, long stay or leisure travelers. This is reflected in the average occupancy rate for hotels in KL hovering around 80%.

Its newly opened Swiss-Garden Residences sits on land measuring 1.7 acres and has a gross development value of RM330 million. It features a south and north tower, which are 33 and 37 storeys high respectively, and has a total of 478 rooms. It provides high-end four-star services suites within walking distance to Chinatown and Jalan Bukit Bintang.

Hotel No. of Rooms Allson Capital Hotel 198 Impiana (extension) 180 Traders Hotel 286 The Regent 236 Pullman Bangsar 515 Grand Hyatt 450 St. Regis 200

Figure 9: Other Incoming Supply of Selected 4-star Hotel and above until 2014

Source: MyCEB

2007

2008

2009

2010

250

200

150

100

50

0

Figure 10: Properties Transacted By Sub-Sector, 2007-2010

STABLE GROWTH FOR MALAYSIAN REAL ESTATE

IN A NUTSHELL 12

The Malaysia Property Market Report 2010 launched recently by National Property Information Centre (NAPIC) reported that most of the sub-sectors enjoyed positive growth, registering 376,583 transactions worth RM107.44b in the market last year.

As evidence of the proactive measures taken by the Goverment to grow the economy, the percentage movement momentum for Malaysian real estate continued to record positive results in all four quarters in 2010.

Based on the Report, the commercial sector registered double digit growth of 19.4% in transaction volume compared with 5% in 2009. The performance of shopping centres consolidated in the review period and the purpose built-office sector remained promising. The national occupancy rate for purpose built-offices managed to remain above the 80% mark.

On a similar note, the industrial, development and agriculture sectors also charted positive growth exceeding 15%.

The residential property sector, however, contracted 2.4% compared to 2009. However, the sector still displayed a stable take-up rate.

Interestingly, the Report made positive mention of Malaysia Property Incorporated’s efforts to market the country’s real estate internationally. On the local front, it commended the Real Estate and Housing Developers Association for actively promoting home ownership throughout 2010. A total of 47,698 residential units were offered for sale, higher than 45,909 units offered last year.

Units (‘000)

Residential AgricultureLegend:

Commercial Development

Industrial

MALAYSIA Residential +7.2 Commercial +19.4 Industrial +22.1Agriculture +16.8Development +20.8

KUALA LUMPUR Residential +5.2 Commercial +22.7 Industrial +9.2Agriculture n/aDevelopment -8.6

SELANGOR Residential +7.3 Commercial +30.8 Industrial +15.7Agriculture +17.0Development +15.0

PENANG Residential +10.9 Commercial +24.5 Industrial +9.4Agriculture +37.2Development +13.2

JOHOR Residential +4.0 Commercial +19.8 Industrial +38.1Agriculture +10.5Development +28.1

SABAH Residential -12.3 Commercial -6.3 Industrial -10.8Agriculture +3.9Development +13.0

Figure 11: Percentage Movement In Number of Property Transactions by Selected State and Sub-sector, Jan - Dec 2010

Source: NAPIC, MPI Research

by Hazrul Izwan

376,383337,859340,240309,455

RM107.44bRM81.02bRM77.14b RM88.34b

Volume and value of transactions

SNAPSHOT 13

ABOUT US

Malaysia Property Incorporated is a Government initiative set up under the Economic Planning Unit to drive investments in real estate into Malaysia. As the first port-of-call for real estate investment queries, Malaysia Property Inc. connects interested parties through an extensive network of government agencies, private sector companies, real estate firms, business councils and real estate-related associations. MPI has two core objectives; to create international awareness and to establish connections between foreign interests and Malaysian real estate industry players, ultimately contributing to real estate investments into the country.

For further information and up-to-date tracking of Malaysian real estate data, visit:www.malaysiapropertyinc.com

For further enquiry, write to:info@malaysiapropertyinc.com

Disclamer: This report contains information that is publicly-available and has been relied on by Malaysia Property Incorporated on the basis that it is accurate and complete. MPI is not liable if the case proves to be otherwise. No warranty or representation, express or implied, is made to the accuracy or completeness of the information contained herein, and the same is submitted subject to errors, omissions, change of price, rental or other conditions, withdrawal without notice, and to any special listing conditions imposed.

14

12

10

8

6

4

2

0

-2

-4

-6

Figure 12: Consumer Price Inflation as Measured by Changes in Consumer Price Index of Selected Economies in the ESCAP Region, 2009-2011

Percentage (%)

Source: ESCAP

Chin

a

Indi

a

Indo

nesi

a

Mal

aysi

a

S.K

orea

Sing

apor

e

Thai

land

Hon

g K

ong

Rates of inflation for 2010 are estimates and those for 2011 are forecast (as of 8 April 2011).

Developing economies of the region comprise 37 economies (excluding the Central Asian countries) and the calculations are based on the weighted average

of GDP figures in 2009 dollars (at 2000 prices)

2009Legend:

2011

2010