A REIT to deal with overhang units
Joseph Wong 

The Real Estate and Housing Developers’ Association’s (Rehda) proposal for a residential real estate investment trust (REIT) to provide housing for rental to the bottom 40 (B40) income group is an eye-opener.

As an alternative solution to home ownership, this REIT could potentially be the first of its kind in Malaysia should it eventually take shape and be approved by the authorities. Moreover, the scheme is also very specific as it only focuses on property units for rental.

At the moment, the details of the REIT are still being ironed out by the association’s research arm, Rehda Institute. Despite this, Rehda is moving forward by spearheading the proposal with the assistance of investment bankers and accountants.

“Once we have formalised it, we will be making submissions to the [Ministry of Finance and Ministry of Housing and Local Government],” says Rehda Institute chairman Datuk Jeffrey Ng during the Budget 2019 conference organised by the institute recently.

“If they are agreeable, then the next step is to go to the Securities Commission,” he explains.

The process of formalising the establishment of the rental REIT, currently called the Rental Housing REIT, will be done by the Malaysian REIT Managers Association (MRMA), of which Ng is also the chairman.

According to Ng, providing more homes for the B40 through public social rental housing could be a way to improve their livelihood, rather than encouraging them to purchase the house.

This is despite the government making certain allocations to provide financial assistance to households earning no more than RM2,300 a month to purchase a house priced below RM150,000 in Budget 2019.

Ng points out that under the proposed REIT, the government will be able to provide land for social or public rental housing in suitable locations in urban centres. The Rental Housing REIT will then undertake the project at its own cost.

The REIT will also be given the right to rental returns from the development for 30 years at pre-fixed rental rates. Ng explains that the new scheme differs from existing public housing schemes, as the focus of the REIT is solely on rentals for the B40 group.


Using unsold units

However, building new properties for the REIT is widely believed to be just one of the ways of injecting assets into the REIT since the construction period could take up to three years.

As a result, some property observers are suggesting that the unsold units held by developers may be possible target assets that can be used as rental property by the REIT.

According to the National Property Information Centre (Napic), there are 685,468 low-cost houses, 470,249 low-cost flats and 322,799 mid-cost flats in the market, making up 26.6% of the current total residential supply.

As of 3Q2018, there is an incoming supply of 7,509, 15,437 and 19,659 units, respectively, yet to be delivered.

A Rehda source says the REIT will more likely aid developers who have unsold low-cost units which are still under construction and those with an overhang of low-cost homes.

Echoing property observers, the Rehda source says there are quite a number of low-cost properties that are facing an overhang situation while others are worried that the incoming units would not be taken up.

Napic’s 1Q2018 figures (see table) show that 40.6% of the overhang properties comprise 10,238 low-cost flats, apartments and condos. Of this figure, 7,931 units are below the RM100,000 mark.

For unsold incoming properties, low-cost flats, and apartment and condominium units number 28,761 or 46.9% for the corresponding period. Of this figure, 19,825 units or 32.4% are units costing below RM300,000.

Property observers are saying that given the figures and current situation, it would be easier for the REIT to be set up within a shorter period if the existing supply was to be injected into it. “Why build more low-cost properties when there is already a big number of them in ready supply?” asks a property observer.


A proposal that’s still in the works

It is learnt that both Rehda Institute and MRMA are still mulling over the details of the REIT.

“We have not seen the [REIT] proposal as yet,” says LBS Bina Group Bhd executive director Datuk Chia Lok Yuen.

The REIT has yet to be finalised by Rehda Institute and the invitation to participate in it has also yet to be received, he says.

“We don’t know what kind of property and who will be participating in the REIT. We believe it will be a vehicle to help developers who have a big number of unsold units that make up the current overhang,” Chia says.

He adds that he was also unsure as to what kind of property will be injected into the REIT since it is targeted at the B40.

Chia also says it is unlikely that LBS will be a candidate for the REIT as it does not have an overhang issue.


Mechanism yet to be ironed out

At the moment, one thing is certain: the REIT will be an investment vehicle and has to abide by the guidelines set by the Securities Commission (SC), says ExaStrataSolutions Sdn Bhd chief real estate consultant and CEO Adzman Shah Mohd Ariffin.

“[Setting up a REIT] can take as long as 12 months depending on the size of the fund and the due diligence [taken to ensure its success],” he tells FocusM.

The SC has an extensive number of guidelines that the REIT has to adhere to so unexpected delays could crop up, he explains.

Adzman, who has vast experience in REITs, set up Hektar Property Services Sdn Bhd to manage three shopping malls and undertake leasing for Hektar REIT.

He was also instrumental in the acquisition of two more shopping malls and various advisory work for Permodalan Hartanah Bumiputra Bhd (PHB), Permodalan Usahawan Nasional Bhd (PUNB) and several developers.


Similar REITS overseas

Another property observer points out that there are similar REITs overseas which deal with rental property but cautions that these countries have a strong and established market for rental properties.

For example, Japan Rental Housing Investments Inc in Japan has been in existence since 2005 and has 13,223 units with a value of RM8.5 bil which are targeted at the rental market, Adzman says.

“The US, UK and Australia have specialist companies which offer only student accommodation,” he says.

In the USA, American Campus Communities Inc and the Education Realty Trust Inc (EDR) are the only two education-specific REITs that are listed, he says, adding that both specialise in student housing.

In Australia, the Folkstone Education Trust invests in real estate of early learning and preschools. The Australian Stock Exchange-listed REIT has total assets under management of A$1.03 bil (RM3.02 bil) as of November last year and 410 early learning properties in its portfolio.

In the UK, there are four REITs specialising in student housing. They are Empiric Student Property Plc, GCP Student Living Plc, Unite Group Plc and Amiri Capital LLP.

A rental REIT is not much different from other REITs as the modus operandi is still the securitisation of real estate assets, says an observer.

“However, the nature of asset allocation of the (proposed Malaysia rental) REIT is mainly rental property for the B40 which will be dependent on the master lessee's business performance to keep up the rental payments during the lease term,” he says. FocusM

This article first appeared in Focus Malaysia Issue 316.