Malaysia led the Asian move to embrace REITs in the early 1990s, but the fledgling market of three small "property trust funds" that listed at that time was marred by a lack of tax incentives for investors, relatively low yields and capital gains and asset overvaluation.
A property market crash during the 1997-98 Asian economic crisis, which still left vacancy rates of 18% at Kuala Lumpur offices and 16% at the city's shopping malls eight years later, worsened matters.
But with one look over the shoulder at neighboring Singapore, Malaysia decided in 2004 to try again to foster a REIT market, allowing local investors in trusts to be taxed on dividends at their personal tax rate rather than the previously uniform 28% REITs were also allowed to buy buildings abroad to enhance returns.
Authorities hoped a rush of property trusts would draw money from the Middle East to the market. But analysts said Malaysia, which is trying to carve out a niche for Islamic finance, would have to do away with the 28% withholding tax it charged on dividends paid to foreign investors before that would happen.
"For Arabs, tax is taboo," said Fazlur Rahman Kamsani, head of regional Islamic finance at property consultants DTZ. "They'll just come and say, `I don't pay tax in my country.' They love Malaysia, but the tax regime would have to be tailor-made to be competitive."
In late 2006, the Malaysian government reconsidered the tax issue, and was proposing to cut withholding tax to 15% for individual investors and domestic institutions and to 20% for foreign institutional investors.
With oil profits and much investment pulled from the US in recent years, analysts were saying in 2005 that the Middle East had around $750 billion of private assets scouring the world for new ideas. The Institute of International Finance estimated that Saudi Arabia, the United Arab Emirates, Kuwait, Oman, Qatar and Bahrain would export at least $450 billion of capital just in 2006 and 2007.
REITs, because they essentially pay rent to investors, are an attractive option because the listed securities are a natural fit for sharia, or Islamic law, which shuns interest payments and speculation. Trusts that want to be sharia compliant cannot have tenants involved in manufacturing and handling pork products, banking and insurance, alcohol, tobacco, weapons or pornography. As a result, serviced apartments or industrial trusts tend to present fewer problems than shopping malls and offices.
In Malaysia, the first trust to list after the 2004 rule changes was Axis REIT, which originally owned five commercial industrial buildings in Petaling Jaya and Shah Alam, housing multinational companies such as Fuji Xerox, Johnson & Johnson and Electrolux. Unlike previous Malaysian trusts, Axis set out from the beginning to be an active REIT, promising to increase its assets rapidly after listing on the stock market by buying up warehouses yielding 7-8%.
By September 2006, Axis had seen its share price increase 42% from its IPO in early 2005, with the addition of four buildings to bring its net asset value to 400 million ringgit ($109 million). At that time, the trust was trading at a 7% Yield, about 280 basis points above 10-year bonds.
Stewart LaBrooy, executive director of Axis REIT's management firm, said the trust planned to double its assets by the end of 2007 to about one billion ringgit.
“We've consistently bought below market prices, around 10% below,” LaBrooy said, “ Our directors are well linked and are always finding nuggets.”
Axis would concentrate its acquisition efforts on Malaysia, where business and logistic park properties were yielding about 7%. But Indonesia, where some buildings are giving 15% yields, was also enticing, La Brooy added.
"There are some nice properties in Jakarta and the yields are phenomenal,” he said, "But there's a huge currency risk issue."
Although the Malaysian market is small, worth about $650 million in later 2006, it had some of the most interesting issuance.
The Al 'Aqar KPJ REIT owns hospitals and Boustead Holdings, and its property arm was planning in late 2006 to sell 500 million ringgit worth of palm oil plantation assets into an Islamic REIT. Hotel owner Tradewinds Corp. Bhd. and YTL Land, which owns shopping Centers and the JW Marriot hotel, were both mulling spinning off trusts.
In December 2006 Singapore's CapitaLand also stepped into the fray, saying it planned to raise as much as $42.2 million in a Kuala Lumpur REIT listing of Malaysian commercial buildings The developer had teamed up with Malaysian real estate firm Quill Group to form the Quill Capita Trust, which was expected to generate an initial distribution yield of 7.14%.
“It’s getting to be a reall potpourri,” LaBrooy said.