Thursday 28 Mar 2024
By
main news image

Diversified assets seen as an investment hedge

A real estate investment trust (REIT) would be an excellent choice for investors who are looking to invest in high-yield yet stable assets. While the FTSE Bursa Malaysia KLCI benchmark has yielded 3.2% over the last 12 months, some REITs have offered more than 9%.

However, when investing in a REIT, besides looking at the yield and entry price, an investor would also have to look at its growth potential, in order to maximise returns and hedge against risks, says Damansara REIT Managers Sdn Bhd CEO Wan Azman Ismail in an exclusive interview with The Edge.

“There are 18 REITs listed on Bursa Malaysia, including four shariah-compliant REITs, with none of these REITs being 100% similar. Every REIT has a slew of property types that brings with itself different risks and returns.

“For an investor looking to invest in a REIT that provides a stable return and with good upside potential, Al-Salam Real Estate Investment Trust is a good choice. This REIT has in its stable, diversified types of property assets — from retail and food and beverage (F&B) to industrial and education,” Wan Azman says, adding that Damansara REIT Managers is also the manager of Al-Salam REIT.

“With an asset size of almost RM1 billion, Al-Salam REIT is one of the biggest shariah-compliant REITs listed on Bursa Malaysia. With the backing of Johor Corporation (JCorp), the Al-Salam REIT has good growth potential, as more assets from the state-owned investment company could be injected into it”.

 

Al-Salam REIT a beneficiary to JCorp's assets

Being a unit of JCorp, Al-Salam REIT owns assets operated by QSR Brands (M) Holdings Bhd, Malaysia's largest quick-serving restaurant operator. In its current portfolio, Al-Salam REIT holds the assets of 22 Kentucky Fried Chicken and Pizza Hut outlets across Malaysia.

But this is only a fraction of numerous KFC outlets in Malaysia, Singapore, Brunei and Cambodia as well as Pizza Hut restaurants in Malaysia and Singapore.

“For Al-Salam REIT, even though it has a close relationship with QSR, this does not mean that it will acquire just any outlet from the group,” Wan Azman declares.

“High yield and income stability will always be the REIT's main criteria when it comes to acquiring assets. This is to ensure an optimal return to the REIT's shareholders and ensure the stability of earnings.”

As at Dec 31,2017, Al-Salam REIT managed to maintain a high yield of 6.1% for QSR’s properties in its stable.

"When it comes to acquiring assets, even though we come from the same group, Al- Salam REIT will always ensure that it acquires only assets with the best yield and growth potential from QSR.

"We will consistently monitor the performance of the KFC and Pizza Hut outlets together with QSR, and acquire the ones that meet our internal yield benchmark and growth potential target," Wan Azman says.

“Looking at the slew of REITs listed on Bursa, Al-Salam REIT arguably has the biggest exposure to the F&B scene in Malaysia — which has been quite resilient despite the slowing domestic economy and uncertainty in the global economic environment.

“With QSR planning to re-list on the local stock exchange with an asset-light strategy, Al-Salam REIT would stand to benefit as the former has sizeable number of outlets across four countries in the region.

“Besides the F&B outlets, Al-Salam REIT also holds industrial assets leased and operated by QSR. These are warehouses in Port Klang and Shah Alam, commissaries (stores for provisions) in Shah Alam and Seberang Prai and factories in Kota Kinabalu and Port Klang.”

Al-Salam REIT has also diversified into the education sector. It owns the four-storey college building of the Malaysian College of Hospitality and Management (MHCM) in Bandar Dato' Onn, Johor Bahru.

MHCM offers diploma-level courses in culinary arts, hotel management, restaurant management, tourism management and early childhood education. It also offers University of Malaya Centre of Continuous Education diploma programmes.

"Education will be one of the sectors that Al-Salam REIT is looking at to diversify into as we build up our asset base over the next three years," says Wan Azman.

"The education asset brings a stable income to the group, with a high yield."

As at Dec 31, 2017, MHCM had generated a 7.55% yield for Al-Salam REIT.

Other assets in the Al-Salam REIT stable include @Mart Kempas hypermarket in Johor Bahru, which had yielded 6.1% as at Dec 31, 2017.

The REIT is also finalising the acquisition of another 22 F&B restaurants across the country at a cost of RM115 million and a Mydin Hypermarket in Gong Badak, Kuala Terengganu, for RM155 million (completed on 21 September 2018).

According to Wan Azman, Al-Salam REIT will expand its asset base by acquiring about RM1 billion worth of assets over the next three years. It is expected to double in size over the next three years from the current asset value of RM1 billion.

 

Jewel in the crown — Komtar JBCC

Al-Salam REIT's jewel in the crown is none other than the strategically located, mid to high-end lifestyle mall, Komtar JBCC, in Johor Bahru — one of the fastest growing cities in Malaysia and the region.

Wan Azman says Johor Bahru's proximity to Singapore, a financial and trade hub in Southeast Asia, means that it receives economic spillover from the city state. Already, the city is bustling with Singaporean shoppers and diners during weekends and public holidays.

“Due to its central location in Johor Bahru — minutes away from the Johor Bahru Customs, Immigration and Quarantine Complex (CIQ) [a large complex at the Causeway to Singapore that accommodates Malaysian Customs checkpoint for cars, trucks, buses and the JB Sentral train station] — Komtar JBCC receives the bulk of Singaporean shoppers and diners who come to the city every day.

“At the moment, about 20% of footfall in Komtar JBCC are Singaporeans,” Wan Azman says.

This enabled Komtar JBCC to generate a yield of 5.9% as at Dec 31, 2017, showcasing its resilience against a slowing economy and sluggish domestic demand.

“Many of the brands represented in Komtar JBCC are the first to be made available in Johor, which gives it a huge following among Johoreans,” says Wan Azman, adding that this will be enhanced once the JB-Singapore Rapid Transit System (RTS) is built by the Malaysian and Singapore governments.

“The RTS station in Johor Bahru will be linked with Komtar JBCC, according to preliminary plans. A site has been identified to house the RTS station in Johor Bahru, and a pedestrian walkway will be built connecting the station to Komtar JBCC.

“Not only does Komtar JBCC provide a high yield to Al-Salam REIT, but the entire Johor Bahru city centre is currently undergoing much development, including the Holiday Inn Hotel and Menara JLand, which is being developed by JCorp,” Wan Azman says.

"These two buildings will increase internal demand and footfall for the outlets at Komtar JBCC. Some of the tenants at Komtar JBCC have signed a revenue-sharing arrangement with us, which means as more people shop and dine there, the more revenue we get.

“The development of the two buildings will ensure that the Johorean market for Komtar JBCC continues to increase, ensuring that the lifestyle mall does not have too high a concentration of patrons from Singapore.”

While at the moment Menara JLand is not part of Al-Salam REIT, Wan Azman discloses that Damansara REIT Managers will observe the yield of the building before deciding whether it would be a great fit.

 

IIBD to further enhance JB's attractiveness

Besides the development of the Johor Bahru city centre itself, the surrounding area will be transformed into one of Malaysia's premier business and investment hubs.

The Ibrahim International Business District (IIBD), a project spearheaded by the Johor state government, will become the southern state and Malaysia's latest economic growth nodes. The project has a gross development value of RM20 billion to RM25 billion,” Wan Azman says.

“Launched on Nov 23, 2015, key infrastructure development of the mega project began in May last year. A 268 meters pedestrian walkway connecting JB Sentral to Persada Annexe and a flyover connecting the Tebrau Corridor to Coronation Square will be constructed.

“All these developments in the central district of Johor Bahru will enhance the city's livelihood and business attractiveness, which bodes well for Al-Salam REIT's Komtar JBCC and Menara Komtar,” Wan Azman adds.

“At the same time, Malaysia's continued economic development will ensure that domestic discretionary consumption continues to grow, which will benefit QSR's F&B outlets, and ensure a stable income for Al-Salam REIT.”

 

Al-Salam REIT to double asset value in three years

One criterion for a well-managed real estate investment trust (REIT) would be the availability of a steady pipeline of assets to be injected into it. This will provide a clear upside potential for the REIT to continue generating a high yield and sustainable returns over the medium to long term.

For Al-Salam REIT — which has the backing of one of Malaysia’s largest government investment companies, Johor Corporation (JCorp) — this means that there is large pool of income-generating assets for it to choose from. In 2017, JCorp had total assets of RM21.8 billion.

The size of JCorp’s assets to be acquired would require Al-Salam REIT to allocate a big amount of capital. According to Wan Azman Ismail — CEO of Damansara REIT Managers Sdn Bhd, the manager of Al-Salam REIT — the plan is for the REIT to acquire about RM1 billion worth of assets over the next three years.

“It should not be a problem for Al-Salam to acquire that much of assets every year due to the big number of assets within JCorp, but we have in place very high standards of requirement when considering future acquisitions.

“This is where the tussle would be in terms of the capital value and yield that are workable for both parties,” he says. As at Dec 31, 2017, Al-Salam REIT’s property yield ranged between 5.9% and 7.6%.

At the moment, Wan Azman says Al-Salam REIT is in the midst of acquiring RM270 million worth of assets.

“We are acquiring 22 QSR outlets worth RM115 million and a Mydin Hypermarket in Gong Badak, Terengganu, for RM155 million.

“After the acquisition of these respective assets, Al-Salam REIT’s gearing ratio will increase to 44% from 35%, as only the RM60 million portion of the purchase consideration of the QSR outlets is being raised via the issuance of approximately 60 million new units of the REIT.

“However, more units will be issued in the future, as Al-Salam REIT seeks to raise funds to acquire more assets, while at the same time reducing its gearing ratio to a level lower than 40%.

“With the acquisitions that are coming in, surely we can expand the units and make ourselves look more attractive to potential investors.”

At the moment, JCorp is the largest unitholder of Al-Salam REIT, holding 388.47 million units, or 66.98%, of the 580 million available units in circulation, before accounting for the 60 million new units to be issued.

“Being a shariah-compliant REIT also gives Al-Salam REIT the edge, as there are only four REITs among those listed on Bursa Malaysia which adhere to the Islamic law’s prohibition of usury and non-permissible activities in certain industries,” Wan Azman says.

“This makes Al-Salam REIT stand out as one of the few REITs in Malaysia which certain institutional funds would want to invest in.

“Besides Tabung Haji, the Employees Provident Fund, Malaysia’s largest institutional fund, has also set up a shariah-compliant fund, which has billions of ringgit to be invested in the local stock market. As at Dec 31, 2017, EPF’s shariah fund had total members’ savings of RM67.76 billion.

“There are also funds from other countries, including those from countries in the West, which do not invest in assets that are involved in non-permissible industries such as tobacco, gambling and liquor. These are the kind of funds we would like to attract with our status as a shariah-compliant REIT.”

The Mydin Hypermarket asset is the first to be acquired by Al-Salam REIT from a third-party vendor. Wan Azman says that many parties have approached Al-Salam REIT and proposed assets to be acquired, including office buildings and retail assets.

However, Al-Salam REIT will adhere to its high standard of asset acquisitions, even if the assets were to come from a sister company within JCorp.

“For example, Menara Komtar, which is almost fully leased by JCorp and Damansara Assets Sdn Bhd, yielded 7.47% as at Dec 31, 2017. In fact, the building gives Al-Salam REIT among the highest yield compared with its other assets.

“Besides acquiring available assets, Al-Salam REIT will also allocate some portion of its capital to greenfield assets, in collaboration with JCorp,” says Wan Azman, while adding that this includes the development of industrial parks in Pengerang and Muar.

      Print
      Text Size
      Share