Top Story : Property – MREITs – The wish list for the 2011 Budget

Sector Update

- For the upcoming Budget 2011, we expect withholding tax rate for local and foreign individual MREIT unitholders to be reduced/removed from the current level of 10%, vs. 0% in Singapore and Hong Kong. We believe this is a necessary move to attract foreign interest and gradually align MREITs with SREITs. Note that the tax structure has not been adjusted since 2008. Last year, RPGT was re-imposed (to curb speculative buying in real estate), but no announcement was made on the REIT sector.

- MREITs would also like to propose to regulators a further relaxation on REIT guidelines: i) To allow REITs with AUM under RM2bn to have multiple placement to grow their market cap, but rules can be enforced if AUM exceeds RM2bn; and ii) Faster process for rights issue exercise for REITs.

- We examined the performance of the two newly-listed REITs – Sunway REIT and CMMT. Performance of both REITs is generally in line with the sector. Given the size and the resulting higher liquidity, valuations of both REITs are higher with a yield of 7% vs. MREIT average yield of 8%. However, if we compare against Singapore retail-based REITs, valuations for both Sunway REIT and CMMT are still a tad lower, even with comparable asset size.

- We maintain our Overweight stance on the sector, due to: i) Continuous economic growth and hence stronger private consumption, industrial and economic activities; ii) Rising young population profile, which is the key driver of consumption; iii) Higher investibility of MREITs following the listing of the two sizeable REITs – Sunway REIT and CMMT; and (iv) REITs provide a good hedge against rising inflation.