Recently Boustead Bhd had announced its Rm500million Islamic Al-Hadharah plantation Reit.

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.

If you found this post useful, keep updated with future posts by subscribing to REITs (for free) through RSS or email.