[Investment] Guide for REITs - Part 3

This is a continuing blog from Guide for REITs Part 1 and Part 2.

What are the investment considerations for REIT?

REITs vs Property Companies

	REITs	Property Companies
Earning Profile	A REIT is driven by recurring rental income	A property company seeks a combination of property sales, development profits, rental income and property investments
Capital Structure and Cash Flow	A REIT has low and defined level of retained earnings, low debt level defined by the regulators and strong cash flow from operations	A property stock has a high gearing ratio due to high capital expenditure required for property development and sometimes negative cash flow; and low dividend payouts
Dividend Distribution Policy	A REIT will distribute 90% – 100%of its retained earnings before tax	A property stock has no certainty of a dividend payout
Risk Profile	A REIT is a low risk, passive investment vehicle with a high certainty of cash flow from rentals derived from lease agreements with tenants	A property stock has a high development and financial risk
Corporate Governance	REITs are governed by multiple layers of stakeholders – unitholders, manger, trustees, regulating authorities ensuring that interest of minority unitholders are protected	A property stock is often dominated by a controlling shareholder which raises conflict of interest issues with minority shareholders

(Source: Bursa Malaysia)

[Investment] Guide for REITs - Part 2

This is a continuing blog from Guide for REITs Part 1.

What kind of returns can be expected from REITs?

• Typically, the returns to unit holders of a REIT can be in the form of:

1. Income distribution based on the distribution policy stated in the REIT's deed; and/or
2. Capital gains which may arise from appreciation of the REIT's price.

What are the performance indicators of REITs?

• Distribution Yield (DY):
• DY = Income distribution paid to a REIT unit holder/ REIT's price paid by the unit holder

Other indicators include the following which are available in annual reports:

• Net Asset Value (NAV):
• The value of a REIT is based on its tangible real estate holdings. This is calculated by the total assets of a company after subtracting all its liabilities.
• Management expense ratio:
• The percentage of operating expenses (management fees, etc.) incurred to the NAV.
• Total return:
• The change in a REIT's price for the period under review plus any income distribution received during the period.

[Investment] Guide for Real Estate Investment Trust (REIT) - Part 1

What is a REIT?

• A Real Estate Investment Trust (REIT) is a fund or a trust that owns and manages income-producing commercial real estate (shopping complexes, hospitals, plantations, industrial properties, hotels and office blocks).
• A management company for a REIT is permitted to deduct distribution paid to its shareholders from its corporate taxable income. However, to enjoy this tax-free status, the REIT must have most of its assets and income tied to the real estate and distribute at least 90% of its total income to investors/unit holders annually.

List of Malaysia REITs 

Name	Dividend Frequency	Type of Property
KLCCP STAPLED GROUP	Quarter	Office, Mall and Hospitality
PAVILION REIT	Semi-Annual	Office and Mall
IGB REIT	Semi-Annual	Retail Mall
SUNWAY REIT	Quarter	Office, Mall, Healthcare and Hospitality
CAPITAMALLS MALAYSIA TRUST	Semi-Annual	Retail Mall
AXIS REIT	Quarter	Office, Industrial (logistics & manufacturing), Hypermarket
YTL HOSPITALITY REIT	Quarter	Hospitality
AL-'AQAR HEALTHCARE REIT	Semi-Annual	Healthcare
AMFIRST REIT	Semi-Annual	Office, Mall and Hospitality
HEKTAR REIT	Quarter	Mall and Hospitality
UOA REIT	Semi-Annual	Office
AMANAHRAYA REIT	Quarter	Hospitality, Higher Education, Office, Industrial and Mall
QUILL CAPITA TRUST	Semi-Annual	Office and Hypermarket
TOWER REIT	Semi-Annual	Office
ATRIUM REIT	Quarter	Industrial (logistics)

[Investment] 7-year DanaInfra Retail Sukuk 4.23% - Fixed Income

Good news! Just read the The Edge Financial Daily today, there is a notice of the offering of 7-year 4.23% Danainfra Retail Sukuk to the public. So here is the brief information on the offering:-

 *Click table to enlarge (Source: DanaInfra Nasional)

Who is the Issuer

DanaInfra Nasional Berhad (“DanaInfra”) is a special purpose vehicle established on 3 March 2011 with  the main purpose of undertaking the funding of infrastructure projects assigned by the Government of Malaysia. DanaInfra’s primary role upon its incorporation is to secure and manage the funding for the Klang Valley Mass Rapid Transit – Sg Buloh-Kajang Line (SBK Line).

Sukuk Structure

Basically, a Sukuk is a shariah compliance fixed income bond. Danainfra Retail Sukuk offers 4.23% p.a coupon with tenure of 7 years. Interest/coupon is paid semi-annually and principal will be paid on the maturity date, which is expected to be on  27/08/2021. This investment has relative low risk as it is guaranteed by the Government of Malaysia.

Investment Size

Why did I say it is a good news in the beginning? Fixed income such as government paper and corporate bond are common investment instruments to institutional investors (fund managers) but not the retail investors (public) as it is oftenly traded over-the-counter (OTC) with minimum investment size of  RM1 million. For this Sukuk, it is a good opportunity to the public as it offered exclusively to retail investors with minimum subscription of RM1,000 (equivalent to 10 unit).

Listing

This Sukuk is a Exchange Traded Bonds and Sukuk (ETBS). ETBS are fixed income securities that are listed and traded on the stock market. Thus, investors are able to trade the bond prior to maturity. Price will be determined by market force.

Important Timeline

Opening date for Danainfra Retail Sukuk offering : 21 July 2014

Closing date for Danainfra Retail Sukuk offering : 15 August 2014
Balloting of DanaInfra Retail Sukuk offering 19 August 2014

Listing and commencement of trading : 27 August 2014

Application

You need to have a CDS account to apply for this Sukuk. Application for Danainfra Retail Sukuk is similar to application for IPO shares. It can be done via application form, ATM or Internet Banking.

In the event of over-subscription, the Issuer will conduct a ballot to determine the allocation to retail investors in a fair and equitable manner.

Investment Risk
Credit Risk
This risk arises if the ETBS issuer is unable to pay the coupon payment on the coupon date or the principal amount to the lender at maturity. However, DanaInfra Retail Sukuk is backed by the central government, thus deemed to have a low credit risk.

Market Risk
This is the risk of price fluctuations and is impacted by the demand and supply in the market.

Interest Rate Risk
It is important to note that price of fixed income have an inverse relationship to interest rates. Valuation of the ETBS may be affected by the changes in interest rates e.g. if the interest rate rises, ETBS prices will fall as investors may relocate their investment to capture a rise in interest rates available in other instruments, for example, in a bank deposit.

For more detailed infor on the offering, please check out the link below before investing:

http://www.danainfra.com.my/images/stories/retailsukuk/DanaInfra_Retail%20Sukuk_Knowledge%20Pack_ENG%20v1.3.pdf

Personal Opinion

This is suitable for low risk and long-term investor. If you only prefer investment/saving like Fixed Deposit (FD) with guaranteed income compared to the volatility in stocks market, then this investment may suit your appetite. The coupon of 4.23% p.a is deemed attractive compared to the current 12-month FD rate of 3.05%-3.90% p.a. Also, it is 47.1 bps higher than 7-year Malaysia Government Securities with yield of 3.759%  (as at 21 July 2014).

This may not suit short-term investors and investors who seek for high return and growth. Just to note in the stock market, Malaysia real estate investment trusts (MREITs) have dividend yield of 5%-7% p.a (as at 21 July 2014). However, it is not directly comparable to fixed income as MREITs have relatively higher risk since the dividend is not guaranteed and the payout will depend on the profitability of the company.

Note: You will receive the face value of Sukuk (RM100/unit) if you hold the Sukuk until maturity date. However, if you intend to sell before the maturity, the Sukuk may be trading at premium (above RM100/unit) or discount (below RM100/unit) depending on the supply/demand and interest rate market environment. Bond price tend to have inverse relationship with interest rate.