For months, analysts have forecast tough times for the Malaysian real estate market and now the storm clouds have started to gather. Confronted with a global economic downturn and an attendant property slump, Malaysia’s market has another problem as a glut of new builds are set to come on line. This combination, analysts fear, will subdue the Malaysian property boom.
OSK Holdings in Kuala Lumpur reminded its clients in November: "In our sector report issued in March ’08, we had warned investors that the 2007/2008 up cycle would peak in late 2008 before losing momentum in 2009 to digest the sudden massive incoming supply of properties."
Given the concerns about a possible oversupply of new launches, especially in the luxury condominium segment, it is perhaps surprising that Malaysia’s real estate market has remained resilient for so long. That resilience has, however, been evident on a number of levels.
The market’s solid performance is reflected in the recent results, if not in the share prices, of several of Malaysia’s real estate investment trusts. Witness the returns posted in the first half of 2008 by one of the country’s oldest property trusts, AmFirst, which was listed in December 2006 and invests principally in the Malaysian office market. In the six months to September 2008, AmFirst posted a 63% increase in revenue, to M$45.4 million ($12.62 million), and a 50% rise in net profit, to M$29.8 million.
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"Iskandar represents a very good opportunity to act as a hinterland for Singapore, but development there has slowed"
Lim Yoon Peng, AmFirst |
"Our focus has been mainly on the market for grade-A commercial buildings in the central business district in Kuala Lumpur where demand is still strong and our properties are nearly 100% full," says Lim Yoon Peng, AmFirst Reit’s chief executive. "We have also completed the acquisition of The Summit, and when we structured the financing we were able to negotiate a guaranteed net income of 9% locked in for six months, which has helped to sustain our performance. So we are well placed to weather the storm."
The Summit Subang, acquired by AmFirst Reit for M$260 million, consists of a 15-storey office tower and a 17-storey four-star hotel.
A number of other Reits investing in a range of assets across the Malaysian real estate sector also turned in healthy results in 2008. Axis, which in August 2005 became the first Reit to list on the local exchange, posted record earnings a share of 3.85 sen in the third quarter of 2008. Among the Islamic Reits, meanwhile, Al-Hadharah Boustead, which specializes in the Malaysian plantation sector, posted turnover and pre-tax profit in the first nine months of 2008 up by 42.5% and 36% respectively.
Much of the strength in Malaysia’s Reits, say local managers, is a reflection of the structure of the sector, which dates back to 1989 and the establishment of the country’s first listed property trusts. Although Malaysia was the first Asian country to introduce LPTs, the market remained illiquid, with the LPTs subject to a host of restrictive regulations. Those were overhauled at the start of 2005, and although they opened up a range of new opportunities for Malaysia’s Reits, the guidelines ensured that their management remained conservative.
"The local Securities Commission has been extremely helpful in its support of Reits," says Stewart Labrooy, chief executive of Axis Reit Managers. "Although there have been a number of changes to the guidelines, most of which have been positive, we are still tightly controlled in terms of our corporate governance and dividend payment schemes."
There are also strict limits on investment into development projects, and on overall gearing. The cap on gearing is 50% of total asset value, although most Malaysian Reits operate with gearing levels of no more than 35% to 40%. Still, debt levels among Reits generally remain low, and because they have interest cover levels of about five or six times, they are regarded by the banks as low-risk operations.
Labrooy adds that as a consequence, the majority of Malaysian Reits generate the lion’s share of their funding from local banks, with their exposure to cross-border financing virtually non-existent.
"Much of the recent global sell-off in the Reits market has been driven by concerns over refinancing," says Labrooy. "But that has never been an issue in the Malaysian market, where local bank debt has been rolled over at competitive levels."
Beyond the relative robustness of the Reits sector, the broader Malaysian real estate market has benefited in recent years from consistent inflows of foreign direct investment into the market in a number of regions. In the business district of Kuala Lumpur, much of the growth in demand has been a by-product of Malaysia’s energetic drive to establish itself as a regional hub for fast-developing Islamic financial services. As Labrooy points out, because there has been very little new office space built in Kuala Lumpur since the Asian financial crisis of 1997, the influx of Shariah-compliant specialists is helping to prop up demand for centrally located prime office property.
Beyond the capital city, demand in Penang is underpinned by investment in the electronics sector as well as by the market for holiday homes. It is in the southern state of Johor that Malaysia has been most eager to attract big-ticket overseas investment. The showcase development there is the economic zone of Iskandar – previously known as the South Johor Economic Region – a 2,200 square kilometre area three times the size of Singapore, which Malaysia hopes will flourish as a new business hub.
Given that Singapore is within 20 minutes by car of the planned Iskandar Financial District, analysts say that this ambitious development project is a sensible long-term way of addressing the finite availability of land in Singapore. A key landmark in the progress of the Iskandar project is Medini, Malaysia’s single largest urban development to date. This 2,300 acre mixed-use urban development has already attracted the support of a number of heavyweight investors from the Middle East, including Kuwait Finance House, Mubadala and Aldar Properties of Abu Dhabi, and Limitless of Dubai.
