2. How can REITs be distinguished?

• By property type,, e.g. shopping malls, industrial properties, residential properties, hotels, commercial properties, etc.
• By geographic location, e.g. specific countries, regions, etc.
• By investment approach. Investors should study the specific REIT prospectus to understand its investment objective and details of the properties to be acquired before making an investment decision.

3. What are the features of listed REITs?

(a) Portfolio Diversification
REITs typically own multi-property portfolios with diversified tenant pools, thus reducing the risks of reliance on a single property and tenant in the case of directly owning a real estate asset.

(b) Income Distribution
REITs normally have regular cash flows. In most cases, most of the revenues are derived from rental payments under contractually-binding lease agreements with specific tenure. Investors should therefore study the occupancy rates of properties acquired by the REIT

(c) Participation in the Property Market
Most REITs are structured around large properties. With REITs, investors can own stakes in such properties.

(d) Professional Management
REITs allow investors the opportunity to buy into properties managed by professional property management companies.

4. What are the returns expected from REITs?
Returns vary for different REITs. A REIT typically distributes dividends regularly based on income generated by the properties in its portfolio. Most REITs have annual managers’ fees, property management fees, trustees’ fees and other expenses that will be deducted from their cash yields before distributions are made.

In Malaysia, for income distributions by REITs that are granted “tax transparent” treatment by the Inland Revenue, eligible unit holders will receive the distributions without having tax deducted at source, for which they subsequently pay income tax at their applicable individual or corporate tax rate. Specific tax treatment and eligibility criteria for tax transparency would be discussed in the prospectus.

5. What are the transaction costs involved in trading listed REITs?

Similar to securities trading, the transaction costs include :

• prevailing brokerage commissions and other charges;
• clearing fee of x% on the value of the contract (subject to a maximum of X$)

6. Redemption by REIT unit-holders
Some REITs do not provide for unit redemption. Regardless of whether redemption is possible, you can dispose your units by selling them on the Exchange through your broker if there is buyer in the market. This is one of the key differences between listed and unlisted REITs.

7. How are listed REITs different from unit trusts?
Unit trusts normally own a portfolio of securities, while REITs primarily own physical real estate assets and real estate-related assets. Unlisted unit trusts can only be bought and sold through the manager of the unit trust fund at prices usually quoted at the end of each trading day. Units of a listed REIT, on the other hand, are bought and sold during trading hours at market-driven prices.

8 What affects returns on REITs?

REITs unit holders are subject to similar risks as holders of other diversified asset portfolios.
Some of the factors which affect returns on REITs are

• Rise/fall in rental income and property prices arising from a change in market conditions. As REITs are intended to be invested primarily in real estate assets, a decline in the general level of real property prices could adversely affect the value of a REIT.
• The overall depth and liquidity of the real estate market and other assets in which REITs are invested may fluctuate, which could correspondingly affect the depth and liquidity of trading in REITs;
• The overall performance or expected performance of the real estate industry and other related industries, or by the general economic climate and outlook;
• Wear and tear, and disasters which damage physical real estate assets owned by the REITs;
• Substantial increase/fall in interest rates, making listed REITs less/more attractive as an investment instrument;
• Professionalism experience affecting the performance of the property management firm;
• Quality of assets owned by the REITs, essentially affecting sustainability and stability of revenues;
• Laws and taxation changes affecting real estate property prices which might impact on returns on REITs. REITs participating in properties or investments overseas may be subject to the risks of fluctuations in currency values, differences in generally accepted accounting principles, or local economic or political events in the countries in which those properties or investments are located; and
• Any other factors affecting returns of the underlying assets.

From the perspective of the plantation owners, unit holders of such Reits and other parties, what then are the advantages, disadvantages or risk features of such a plantation reit compared to other types of reit like hotel, real estate, resort and hospital type?

The advantages might include the following:

• Like other Reit, from the plantation company’s perspective, the instant cash from the sale of units in the REIT would help pare down debts and lower gearing;

• For the investor, there is greater transparency and corporate governance as managers are likely required to disclose key performance indicators related to the efficiency of the plantation operations, such as yield per hectare, the oil extraction rate, cost per tonne, among others to the public;

• Plantation Reits will provide Malaysian capital market another source of financial instrument hence adding dynamism and diversity. Earlier article shown the attempt by Kuwait Finance to persuade GLC to divest their plantation assets to such Reits to provide a bigger investment based for the Middle East Investors;

• Other plantation players which we have many in the country which would then derive windfall gains from such establishment of Reit. Although details of the lease payment and potential distribution from al-Hadharah Boustead REITs are not known yet, but by using Boustead Properties’ selling price of RM36,678 per ha as a benchmark, and assuming other plantation players were to dispose of a mere 20% of their plantation land to a REIT investment structure, there is a whopping 20% to 61% upside on these companies’ EPS, forward.

The disadvantages of a plantation reit can be attributed to its higher risk profile which are mainly due to the inherent risk residing in investing in plantations :

• Their crops are highly susceptible to bad weather, pests and diseases. Bad weather could destroy crops and raise product price. The threat from bad weather is harder to manage as it is beyond man’s control and
• Investors of plantation REITs are also exposed to volatility in commodity prices since crops like oil palm are subject to commodity cycles. Speculators out to make a quick buck may only heighten the risks of investing in commodities. This risk is in turn reflected in the price of plantation stocks or REITs.

In view of the above risks mentioned pertaining to a plantation Reit, an investor should therefore be cautious about:

• How much value of assets being injected into the plantation Reit which should preferably be at a much higher discount. For example, Axis REITs’ assets were injected at a 12% discount compared with its peers’ 0% to 4%, translating into a yield of 9.8% for Axis versus its peers’ 6.4% to 7.3% on listing;

• What types of assets being injected into the trust. For conventional Reits, it is the building and the rental yield. For plantation Reits, it will be the crops planted on the land, namely fresh fruit bunches(ffb) from oil palm trees or latex from rubber trees and last but not least;

• The location of the plantation land is a crucial factor in the valuation of a plantation Reit. The closer it is to developed towns and infrastructure, the higher the potential for appreciation in value. As the towns develop, the estates stand a high chance of being converted into housing or commercial property development, hence enhancing the value of the plantation Reit.