KUALA LUMPUR: The Selangor State Development Corp (PKNS) is looking to put its commercial property assets, which include the Shah Alam Convention Centre (SACC) Mall and Menara PKNS Petaling Jaya, into a real estate investment trust (REIT) and list it on Bursa Malaysia within three years.

The REIT that it is considering would initially be valued at RM1 billion, said PKNS Real Estate Sdn Bhd (PREC) general manager Fakru Radzi Ab Ghani.

“The move will allow PKNS to unlock the value of its commercial properties and allow it to be more competitive (in buying assets),” he told The Edge Financial Daily in an interview.

Fakru said PREC, a wholly-owned subsidiary and property development arm of PKNS, will be the REIT sponsor and will retain a majority stake in the REIT post-listing, which is expected to yield an indicative capitalisation rate of 6%.

“With proper structure in place, we are now on track to launch the REIT in the next three years with an initial asset size of RM1 billion,” he added.

The property assets PREC currently manages comprise SACC, Menara PKNS, Menara Worldwide and Wisma Yakin in Kuala Lumpur, Kompleks PKNS Shah Alam and Kompleks PKNS Bangi — worth a combined RM671 million.

Fakru said out of the total assets, SACC, Menara PKNS and Menara Worldwide — which are valued at RM500 million — will be among the initial assets to be injected into the REIT.

He noted that the three buildings currently enjoy an occupancy rate of over 80% and have an average gross rental yield of between 9% and 20%, with prime floors fetching a rental rate of between RM8 per sq ft and RM15 per sq ft.

Menara Worldwide has a net lettable area (NLA) of 273,000 sq ft while Menara PKNS has 193,909.63 sq ft and SACC 194,747 sq ft.

Fakru said Kompleks PKNS Shah Alam, Kompleks PKNS Bangi and Wisma Yakin, which have a combined value of RM171 million, will not be injected into the REIT as PREC has to balance its profit motive with its social obligations.

The three buildings fetch a lower rental rate of between RM1.50 per sq ft and RM5 per sq ft, which is below market rate.

“Some of the tenants in the three buildings have been there for more than two decades. We have allocated some RM10 million to upgrade the facilities in these three buildings and once that is done, only then we will review the rental rate,” he said.

According to analysts, Malaysian REIT counters have lost some lustre in the last 18 months as REIT managers are facing cost pressures from higher maintenance cost, utilities and assessment rates, while rental reversion cycles appeared to have lost momentum due to softening demand, especially in the office sector.

Fakru is unfazed by this, saying the proposed PKNS REIT will consist of mix retail and commercial properties that are on par with other players and strategically located.

“I foresee the demand for REITs will start to pick up by then (three years from now). Now, 51% of our portfolio consists of office space, while the remaining 49% is the (SACC) mall.

“Our appetite is diverse, and we do not mind acquiring other suitable commercial assets such as a logistic warehouse or even dilapidated buildings at strategic locations to create value from the assets we own,” he said.

This year, PREC is targeting to acquire RM500 milllion worth of new assets, which will help boost the asset size of its proposed REIT to RM1 billion leading up to its listing.

This is not PKNS’ first attempt to launch a REIT. It had on September 2, 2010 planned to inject Kompleks PKNS Shah Alam, SACC and Menara PKNS into AmanahRaya REIT in exchange for RM270 million cash and a 30% stake in the trust.

However, the deal was mutually terminated on December 2, 2011. It is understood that the reason was due to the assets failing to meet the Securities Commission Malaysia’s requirement on grounds that they were not ready to be monetised.

Going forward, Fakru said PKNS also plans to inject some components in its ongoing commercial developments such as Datum Jelatek in Kuala Lumpur, Laman PKNS in Shah Alam, PJ Sentral Garden City, SACC Mall (second phase) and Selangor Science Park 2 in Sepang into the REIT. These projects have a combined gross development value of more than RM10 billion.

This article first appeared in The Edge Financial Daily, on February 9, 2015.