New MREIT rules create opportunities

Asian Property Review chats with Noel Neo, the Senior Vice President (Research & Investor Interface) of APREA who was in Malaysia recently to discuss the Malaysian Securities Commission’s proposals to reinvigorate the nation’s REIT market.
Text by Jan Yong
screen-shot-2016-10-29-at-5-54-22-pmThe proposed new framework would allow REITs (Real Estate Investment Trusts) to: i) acquire vacant land and undertake property development (and redevelopment) up to a ceiling of 15% of total asset value, ii) choose between internal and external management, and iii) better manage Shariah compliance obligations.
Neo is of the opinion that most of the proposals make perfect sense as they bring Malaysia’s REIT market in line with ‘state of the art’ REIT frameworks in other countries.
Under the existing rules, REITs which wish to re-develop a property they own or add an extension have to sell the property to a developer and re-purchase the property upon completion of the project. “Allowing REITs to undertake some development activity solves the inefficiency present under these existing rules,” he says.
“The change will also enable REITs to create property products that fit the needs of their specific investment strategy rather than rely on the market which may not be developing those types of properties.”
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“Further, the risk is contained by the Securities Commission’s safeguards in respect of the limit on the amount of development work undertaken. These include a development cap at 15% of the REIT’s total asset value and requiring the REIT to seek unitholder approval if it wishes to sell a developed asset within two years of completion.
“The proposal is thus aimed at allowing REITs more flexibility rather than letting them morph into developers.”
Neo also highlights the fact that Malaysian REITs have been a standout performer among Asia Pacific REIT markets, with the TR GPR APREA Malaysia REIT index advancing 24% yearto- date July 2016.” – Yet, investors are not rushing into MREITs. Why?
Explains Neo, “REITs are a relatively young asset class in Asia. Many investors are not familiar with REITs or how to evaluate their investment characteristics. What is needed is education and APREA (Asia Pacific Real Estate Association Limited) is at the forefront of the investor’s education effort.”
Additionally, Malaysia also needs more concerted industry efforts such as trade missions, expos and dedicated outreach programmes to attract global investors who are more focused on gateway cities and who tend to adopt a “risk-off ” strategy.
Neo also views Bank Negara Malaysia’s policy rate cut by 25bps to 3% as good for supporting property prices because “this should generate economic velocity and investment activity in Malaysia.”
“Looser monetary policy can also benefit the property sector via a favourable widening of the spread between rental yields and interest rates.”
Hence, despite much focus on a high-profile financial scandal in Malaysia, Singapore’s northern neighbour still carries a very compelling story for those looking for medium to long-term value. As Neo says, “The window of opportunity has just opened up in Malaysia [through new and more flexible MREIT rules].”

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