THE MALAYSIAN REIT DEVELOPMENT AND THEIR ROLE

THE MALAYSIAN REIT DEVELOPMENT ANDTHEIR ROLE IN A PORTFOLIO

By

ATASYA OSMADI

A thesis submitted in fulfilment of the requirements for the Degree ofDoctor of Philosophy at the University of Western Sydney

March 2010

ii

UNIVERSITY OF WESTERN SYDNEY

This thesis has been produced by a student of this University to satisfy learning

requirements of a postgraduate course.

While University staff may have offered supervision and advice to the author, the

University is unable to accept responsibility for any advice, recommendations,

suggestions or conclusions contained in this piece of work.

The University gratefully acknowledges the co-operation given to the student author

since studies such as these permit students to examine real world issues in a context

which provides an opportunity for meaningful research to be conducted and reported.

iii

DECLARATION

This thesis has been prepared by me to meet the requirements of a Doctor of

Philosophy degree at the University of Western Sydney.

I declare that this thesis represents my own work, except where due acknowledgement

is made, and that it has not been previously included in a thesis, dissertation or report

submitted to this University or to any other institution for a degree, diploma or other

qualification.

All possible care has been taken in the preparation of the information in this thesis;

however, I expressly disclaim any liability for the accuracy and sufficiency of the

information and under no circumstances shall either be liable in negligence or

otherwise in and arising out of the preparation or supply of the information in this

thesis.

Signed

Atasya Osmadi

iv

ACKNOWLEDGMENTS

This thesis was made possible with the assistance of the following people. Professor

Graeme Newell, my principal supervisor, has been very supportive and constructive

throughout my candidature. I would like to take this opportunity to express my

utmost gratitude for his guidance, encouragement and continuous support throughout

my research. Numerous property scholars and practitioners have also provided

constructive input to this thesis and I sincerely thank them. I would also like to

express my gratitude to my sponsors from the Public Service Department of Malaysia,

Ministry of Higher Education (Malaysia) and University Sains Malaysia for giving

me the privilege to do my PhD with Professor Graeme Newell in University of

Western Sydney.

I also gratefully acknowledge anonymous professionals and respondents to my

surveys who have been of assistance and supplied me with information important to

this thesis which have helped me to accomplish my PhD. Last, but not least, I

sincerely thank my family and friends especially my parents for their continuous

support throughout this period.

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Table of Contents

Declaration iii

Acknowledgments iv

Table of Contents v

List of Tables x

List of Figures xvi

List of Abbreviations xvii

Executive Summary xix

Chapter 1: Introduction

1.1 Overall Context 1

1.1.1 Significance of Direct Property 8

1.1.2 Significance of Indirect Property 9

1.2 General Significance of the Malaysian Economy and Commercial Property

Markets 11

1.2.1 Significance of REITs in Malaysia 15

1.3 Objectives of the Study 17

1.4 Literature Review 19

1.4.1 Property in a Portfolio 19

1.4.2 REITs 22

1.4.2.1 REITs in US 22

1.4.2.2 A-REITs in Australia 23

1.4.3 REITs in Asia 24

1.4.4 M-REITs in Malaysia 25

1.5 Organisation of the Thesis 33

Chapter 2: Global Real Estate Investment Trusts and

Property Trust Vehicles

2.1 Global Status of REITs and Property Trust Vehicles 36

2.2 Malaysia REITs 52

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2.3 Global Property Securities Funds 55

2.3.1 Significance of Asia REITs 57

Chapter 3: Significance of Malaysian Commercial Property Markets

3.1 Significance of Malaysia: Social, Economic Activity and Demographics 58

3.2 Commercial Property Market Universe 60

3.2.1 Global Property Investor Interest 64

3.3 Malaysian Commercial Property: Asia Context 67

3.4 Property Ownership Structures 70

3.4.1 Property Companies 70

3.4.2 REITs 70

3.4.3 PTFs 72

3.4.4 REITs 74

3.4.5 Comparison Between PTFs and REITs 75

3.4.6 Comparison Between Conventional REITs and Islamic REITs 76

3.4.6.1 Characteristics of Islamic Finance 76

3.4.6.2 Characteristics of Islamic REITs 84

3.5 Market Size – Liquidity Issues 88

3.6 Future Opportunities 89

Chapter 4: Methodology

4.1 M-REIT Index Development 90

4.2 M-REIT Performance Analysis and Other Asset Classes 95

4.3 M-REIT Surveys 98

Chapter 5: Malaysian REIT Performance Analysis

5.1 Introduction 100

5.2 Property Trust Fund Analysis (1989-2005) 102

5.2.1: Risk-adjusted Returns: PTF 105

5.2.2 Portfolio diversification benefits: PTFs 106

5.3 Overall M-REIT Analysis (2005-2008) 107

5.3.1 Risk-adjusted Returns: M-REITs 111

5.3.2 Portfolio Diversification Benefits: M-REITs 112

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5.4 Conventional M-REIT Analysis (2005-2008) 113

5.4.1 Risk-adjusted Returns: M-REITs 114

5.4.2 Portfolio Diversification Benefits: Conventional M-REITs 115

5.5 Islamic M-REIT Analysis (2006-2008) 116

5.5.1 Risk-adjusted Returns: Islamic M-REITs 117

5.5.2 Portfolio Diversification Benefits: Islamic REITs 118

5.6 Significance of the Global Financial Crisis Via Sub-period

Performance Analysis for M-REITs 118

5.6.1 Risk-adjusted Returns 119

5.6.2 Portfolio Diversification Benefits 121

5.7 Significance of Global Financial Crisis Via Sub-period

Performance Analysis for Islamic M-REITs 122

5.7.1 Risk-adjusted Returns 122

5.7.2 Portfolio Diversification Benefits 125

5.8 Mixed-asset Portfolios for M-REITs 127

5.8.1 Mixed-asset Portfolios for Overall M-REITs 128

5.8.2 Mixed-asset Portfolios for Islamic M-REITs 132

5.8.3 Importance of Global Financial Crisis on Overall M-REITs and

Islamic M-REITs 138

5.8.3.1 Overall M-REITs 138

5.8.3.2 Islamic M-REITs 147

5.9 Efficient Frontier and Diagrams 158

5.9.1 Impact of Global Financial Crisis 160

5.10 M-REITs Panel Regression 165

5.11 Conclusion 168

Chapter 6: M-REIT Surveys

6.1 Introduction 180

6.2 Importance of Factors Regarding the Current Performance of M-REITs 181

6.2.1 Overall 181

6.2.2 REIT Managers 184

6.2.3 Property Advisors 187

6.2.4 Fund Managers 189

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6.2.5 Comparison of the Groups of Participants 191

6.2.6 Factor Analysis Regarding Current Performance Factors 195

6.3 Importance of Factors Regarding the Ongoing Success of M-REITs 196

6.3.1 Overall 196

6.3.2 REIT Managers 200



6.3.5 Comparison of the Three Groups of Participants 206

6.3.6 Factor Analysis Regarding Ongoing Success Factors for M-REITs 209

6.4 Comments From Respondents 210

6.4.1 M-REIT Fund Managers 211



6.5 Conclusion 216

Chapter 7: Summary

7.1 Summary of Contributions of the Research 217

7.2 Summary of Limitations 217

7.3 Suggestions 218

7.4 Summary of Future Research 220

References 224

Appendices 237

Appendix I The Survey Questionnaire for REIT Managers 238

Appendix II The Survey Questionnaire for Property Managers 239

Appendix III The Survey Questionnaire for Fund Managers 240

Appendix IV Global REITs 241

Appendix V M-REIT Case Studies 242

Appendix VI Paper Published for Journal of Property Research 243

Appendix VII Paper Published for PRPRJ 244

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List of Tables

Table 1.1: Countries with Existing and Considering REIT-like Structures 3

Table 1.2: Global REIT Comparison 5

Table 1.3: List of Advantages and Disadvantages of Direct Property 8

Table 1.4: Advantages and Disadvantages of Indirect Property 10

Table 1.5: Private/Unlisted Property 10

Table 1.6: Listed Securities in a REIT Structure 11

Table 1.7: Economic and Financial Profile of Malaysia: 2008 12

Table 1.8: Global Competitiveness of Malaysia 13

Table 1.9: Commercial Property Transactions in Asia: 2008 14

Table 1.10: Breakdown of Malaysia’s Commercial Property Sales by Market:

2008

14

Table 1.11: Asia Office Market Performance: 2008 16

Table 1.12: Asia Retail Market Performance: 2008 16

Table 1.13: Asia Industrial Market Performance: 2008 16

Table 2.1: Growth of REITs 37

Table 2.2 Global Real Estate Universe: 2009 38

Table 2.3: Property Performance as at December 2008 40

Table 2.3: Property Performance as at December 2008 (cont.) 41

Table 2.4: Significance of Listed Property Securities Markets in Asia:Dec.2008 43

Table 2.5: Global REIT Market: December 2008 45

Table 2.6: Top 50 Largest REITs Globally: December 2008 47

Table 2.6: Top 50 Largest REITs Globally: December 2008 (cont.) 48

Table 2.7: Global REIT Market Performance to December 2008 50

Table 2.8: Property Profile of Malaysian REITs*: December 2008 54

Table 2.9: Global Properties Securities Funds in 2007 56

Table 3.1: Social, Economic and Financial Profile of Malaysia: 2008 59

Table 3.2: Economic Growth Forecasts for Asia markets: 2009-2010 60

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Table 3.3: Composition of RCA Commercial Property Transaction Database:

2007-2008 61

Table 3.4: Transparency of Property Markets: 2008 63

Table 3.5: Global Competitiveness Among Countries: 2008 63

Table 3.6: Corruption Perception of Countries: 2008 64

Table 3.7: Regulation for Asian REITs in the Region 66

Table 3.8: Commercial Property Transactions in Asia: 2007 68

Table 3.9: Property Profile of Malaysia: 2008 69

Table 3.10: Characteristics of Malaysian REITs 71

Table 3.11: List of Malaysian REITs by December 2008 74

Table 3.12: Comparison Between PTFs and REITs 75

Table 3.13: Major Islamic Financial Institutions 77

Table 3.14: Islamic Finance and Islamic Property Investment Institutions/Funds 78

Table 3.15: Major Islamic Property Funds 79

Table 3.16: Comparison Between Islamic and Conventional Financial Systems 80

Table 3.17: Financial Needs with Islamic Contracts Applied 82

Table 3.18: Comparison Between Islamic and Conventional REITs 87

Table 4.1: Investment Performance Index Applications 91

Table 4.2: Components of PTF and Various M-REIT Indices 92

Table 5.1: PTFs Performance Since IPO (as of 29 July 2005) 103

Table 5.2: Property Trust Fund (PTF) Performance: Dec. 1989 – July 2005 106

Table 5.3: Property Trust Fund (PTF) Correlation: Dec. 1989 – July 2005 107

Table 5.4: M-REIT Performance Since IPO (as of 31 December 2008) 108

Table 5.5: M-REITs: Gearing Details (as 31 December 2008) 109

Table 5.6: M-REITs: Latest Dividend Distribution Ratio 110

Table 5.7: Overall M-REIT Risk Adjusted Return Analysis:

8 August 2005 – 29 December 2008 112

Table 5.8: Overall M-REIT Correlation Analysis:

8 August 2005 – 29 December 2008 113

Table 5.9: Conventional M-REIT Risk-Adjusted Return Analysis:

8 August 2005 – 29 December 2008 115

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Table 5.10: Conventional M-REIT Correlation Analysis:

8 August 2005 – 29 December 2008 116

Table 5.11: Islamic M-REIT Risk-Adjusted Return Analysis:

21 August 2006 – 29 December 2008 117

Table 5.12: Islamic M-REIT Correlation Analysis:

21 August 2006 – 29 December 2008 118

Table 5.13: Overall M-REIT Pre-Global Financial Crisis Analysis:

8 August 2005 – 27 August 2007 119

Table 5.14: Overall M-REIT Post-Global Financial Crisis Analysis:

3 September 2007 – 29 December 2008 120


8 August 2005 – 27 August 2007 121



Table 5.17: Islamic M-REIT Pre-Global Financial Crisis Analysis:

21 August 2006 – 27 August 2007 123

Table 5.18: Islamic M-REIT Post-Global Financial Crisis Analysis:



21 August 2006 – 27 August 2007 126

Table 5.20: Islamic M-REIT Post-Global Financial Crisis Analysis: 3 September

2007 – 29 December 2008 127

Table 5.21: Scenario 1: Overall M-REIT vs KLCI Performance:

8 August 2005 – 29 December 2008 129

Table 5.22: Scenario 2: Overall M-REIT vs KLSE Property Sector Performance:

8 August 2005 – 29 December 2008 130

Table 5.23: Scenario 3: Overall M-REIT vs KLSE Plantation Sector

Performance: 8 August 2005 – 29 December 2008 131

Table 5.24: Scenario 4: Overall M-REIT vs KLSE Finance Sector Performance:

8 August 2005 – 29 December 2008 132

Table 5.25: Scenario 5: Islamic M-REIT vs. Conventional M-REIT


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Table 5.26: Scenario 6: Islamic M-REIT vs KLCI Performance:

21 August 2006 – 29 December 2008 134

Table 5.27: Scenario 7: Islamic M-REIT vs KLSE Property Sector Performance:

21 August 2006 – 29 December 2008 135

Table 5.28: Scenario 8: Islamic M-REIT vs KLSE Plantation Sector


Table 5.29: Scenario 9: Islamic M-REIT vs KLSE Finance Sector Performance:

21 August 2006 – 29 December 2008 137

Table 5.30: Scenario 10: Overall M-REIT vs KLCI Pre-Global Financial Crisis

Performance: 8 August 2005 – 27 August 2007 139

Table 5.31: Scenario 11: Overall M-REIT vs KLSE Property Sector Pre-Global

Financial Crisis Performance: 8 August 2005 – 27 August 2007 140

Table 5.32: Scenario 12: Overall M-REIT vs KLSE Plantation Sector Pre-

Global Financial Crisis Performance: 8 August 2005 –

27 August 2007 141

Table 5.33: Scenario 13: Overall M-REIT vs KLSE Finance Sector Pre-Global


Table 5.34: Scenario 14: Overall M-REIT vs KLCI Post-Global

Financial Crisis Performance: 3 September 2007 – 29 Dec. 2008 143

Table 5.35: Scenario 15: Overall M-REIT vs KLSE Property Post-Global


Table 5.36: Scenario 16: Overall M-REIT vs KLSE Plantation Post-Global


Table 5.37: Scenario 17: Overall M-REIT vs KLSE Finance Post-Global


Table 5.38: Scenario 18: Islamic M-REIT vs Conventional M-REIT Pre-Global


Table 5.39: Scenario 19: Islamic M-REIT vs KLCI Pre-Global


Table 5.40: Scenario 20: Islamic M-REIT vs KLSE Property Sector Pre-Global


Table 5.41: Scenario 21: Islamic M-REIT vs KLSE Plantation Sector Pre-Global


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Table 5.42: Scenario 22: Islamic M-REIT vs KLSE Finance Sector Pre-Global


Table 5.43: Scenario 23: Islamic M-REIT vs Conventional M-REIT Post-Global


Table 5.44: Scenario 24: Islamic M-REIT vs KLCI Post-Global


Table 5.45: Scenario 25: Islamic M-REIT vs KLSE Property Post-Global


Table 5.46: Scenario 26: Islamic M-REIT vs KLSE Plantation Post-Global


Table 5.47: Scenario 27: Islamic M-REIT vs KLSE Finance Post-Global


Table 5.48: M-REIT Financial and Management Performance From 2007- 2009 166

Table 5.49: Dependent Variable: Return on Equity (ROE) 170

Table 5.50: Dependent Variable: Gross Margin 171

Table 5.51: Dependent Variable: Nett Asset Backing per Share 172

Table 5.52: Dependent Variable: Free Cashflow to Capital 173

Table 5.53: Dependent Variable: Liquid Asset per Share 174

Table 5.54: Dependent Variable: Asset Turnover 175

Table 5.55: Dependent Variable: Altman’s Z-Score 176

Table 5.56: Dependent Variable: Debt per Equity Ratio 177

Table 5.57: Overall M-REIT and Performance Report Card:

8 August 2005 – 28 December 2008 179

Table 5.58: Islamic M-REIT Performance Report Card:

21 August 2006 – 28 December 2008 179

Table 6.1: Importance of Factors Regarding the Current Performance of

M-REITs 182


M- REITs: REIT Managers 186


M-REITs: Property Advisors 188


M-REITs: Fund Managers 190

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Table 6.5: Rank Correlation Between Groups on Importance of Factors

Regarding the Current Performance of M-REITs 191


M-REITs: ANOVA 193

Table 6.7: Importance of Factors Regarding the Ongoing Success of M-REITs 197

Table 6.8: Importance of Factors Regarding the Ongoing success of M-REITs:

REIT Managers 201

Table 6.9: Importance of Factors Regarding the Ongoing Success of M-REITs:

Property Advisors 203


Fund Managers 205

Table 6.11: Rank Correlation Between Groups on the Importance of Factors

Regarding the Ongoing Success of M-REITs 206


ANOVA 207

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List of Figures

Figure 1.1: Risk-return Spectrum of Commercial Property Investment

Opportunities 6

Figure 1.2: Profile of Commercial Property Investment Opportunities 7

Figure 2.1: Macquarie Eclipse REITs Development 57

Figure 4.1: Property Trust Fund Timeline 93

Figure 4.2: Overall M-REIT Timeline 93

Figure 4.3: Conventional M-REIT Timeline 94

Figure 4.4: Islamic M-REIT Timeline 94

Figure 5.1: Growth in Market Capitalisation of Overall M-REIT Index and

Conventional M-REIT Index Market 101

Figure 5.2: Growth in Market Capitalisation of Islamic M-REIT Index 102

Figure 5.3: Property Trust Fund Index Against the KLCI 104

Figure 5.4: Overall M-REIT Index in Comparison to KLCI 111

Figure 5.5: Conventional M-REIT Index Against KLCI 114

Figure 5.6: Islamic M-REIT Index Against KLCI 116

Figure 5.7: M-REIT Efficient Frontier: August 2006 – December 2008 158

Figure 5.8: M-REIT Asset Allocation Diagram: August 2006 – December 2008 160

Figure 5.9: M-REIT Efficient Frontier: pre-GFC 161

Figure 5.10: M-REIT Asset Allocation Diagram: pre-GFC 162

Figure 5.11: M-REIT Efficient Frontier: GFC 163

Figure 5.12: M-REIT Asset Allocation Diagram: GFC 164

Figure 5.13: Calculation Using EVIEWS 169

xvi

List of Abbreviations

Abbreviation Full Name/Term

A-REIT Australian REIT

ASX Australian Stock Exchange

CBRE CB Richard Ellis

CPO Crude Palm Oil

CR-REIT Corporate Restructuring Real Estate Investment Trust

Dec. December

EMEA Europe, the Middle East and Africa

EPRA European Public Real Estate Association

EREIT Equity Real Estate Investment Trusts

Excl. Excluding

GBP Pound Sterling

HK-REIT Hong Kong Real Estate Investment Trust

IPG Investa Property Group

J-REIT Japanese Real Estate Investment Trust

JLL Jones Lang LaSalle

K-REIT Korean Real Estate Investment Trust

KLCI Kuala Lumpur Composite Index

KLSE Kuala Lumpur Stock Exchange

KLSEFIN Kuala Lumpur Stock Exchange Finance

KLSEPLN Kuala Lumpur Stock Exchange Plantation

KLSEPRP Kuala Lumpur Stock Exchange Property

KSE Korea Stock Exchange

LPT Listed Property Trust

M-REIT Malaysia REIT

MER Management Expense Ratio

Mkt. cap. Market Capitalisation

xvii

Abbreviation Full Name/Term

NAREIT National Association for Real Estate Investment Trusts

NCREIF National Council of Real Estate Investment Fiduciaries

PIR Property Investment Research

PRRES Pacific Rim Real Estate Society

PTF Property Trust Fund

PSF Property Securities Fund

South Africa Property Unit Trust

REIT Real Estate Investment Trust

RM Ringgit Malaysia

S$ Singapore Dollar

SFC Hong Kong Securities and Futures Commission

SGX Stock Exchange of Singapore

SICAFI Sociétés d'investissement a capital fixe en immobiliere

SIIC Sociétés d'investissements immobiliers cotees

S-REIT Singaporean Real Estate Investment Trust

T-REIT Taiwanese Real Estate Investment Trust

TSE Tokyo Stock Exchange

UK United Kingdom

US United States of America

US$ US Dollar

xviii

Executive Summary

This PhD research will examine the development, performance and impact of

Malaysian REITs in the local, Asian and global REIT investment market; particularly

focusing on Islamic REITs in Malaysia. This issue is important as REITs have

emerged as a topic of considerable interest to the academic community, international

investors, policy makers and the public at large; particularly with the recent

significant development of REITs in Asia in recent years.

The objectives for this research are:

1. To compare the structure and regulation of Malaysian REITs with other

countries; both in Asia and internationally and differentiate the structure

between Malaysian conventional M-REITs and Islamic M-REITs

2. To develop an Malaysian REIT performance index and a sub-sector Islamic

M-REIT performance index and identify the impact of the Global Financial

Crisis on Malaysian REIT performance by analysing the risk-adjusted returns

performance for Malaysian REITs and Islamic M-REITs and analysing the

portfolio diversification benefits of Malaysian REITs and Islamic M-REITs in

a mixed-asset portfolio

3. To conduct an investment industry survey to identify the problems, challenges

and the possible solutions relating to a successful Malaysian REIT market

4. To identify Malaysian REIT prospects by determining the strategy for its

further strategic development and investor acceptance.

In terms of portfolio diversification for the whole period of 8 August 2005 till

December 2008, the overall M-REIT and Islamic M-REIT sector delivered strong

portfolio diversification benefit. However, one should be cautious before concluding

that Islamic M-REITs and conventional M-REITs have a smaller role in the mixed-

asset portfolio. Factors such as small sample bias as well as short study period (2½

years) should be taken into consideration.

xix

The survey results have revealed the key elements on the importance of the factors

regarding the current performance and the ongoing success of M-REITs. For all three

groups (property managers, fund managers and property advisors), the key points in

which they have equal agreement on the importance of factors regarding the current

performance of M-REITs are dividend growth and acquisition of new assets, while

the significant risk factors regarding M-REITs is the level of borrowings. In terms of

factors for the ongoing success, growth strategy is considered to be a significant

factor, which includes professional management, acquisition of new assets, dividend

growth and transparency in every aspect; especially in terms of regulation and

finance.

Overall, further research is clearly needed to further expand the understanding of

REITs in Malaysia, their investment dynamics and investor appeal. With the expected

future growth of M-REITs after the global financial crisis, this research will provide

increased understanding of M-REITs in an investment portfolio. In particular, this

understanding will also be relevant to the development of Islamic REITs, with the

expected future growth in Islamic property investment products and opportunities

globally.

1

CHAPTER 1

INTRODUCTION

1.1 Overall Context

Real estate investment trusts (REITs) are a form of property securitisation which has

proven to be a successful property investment vehicle in Australia, as well as in the

US. REITs provide investors with exposure to quality commercial property portfolios

via being listed on the stock market; serving as a hybrid investment vehicle. Recent

years have seen an increase of interest in real estate investment trusts (REITs) at a

global level; particularly amongst global property securities funds and international

investors. However, with this growing REIT awareness from international property

investors, there is a need for the further development of more innovative performance

analysis, products and opportunities to identify enhanced property portfolio

diversification benefits.

REITs have developed rapidly in recent years, with the number of REITs growing

significantly. This has seen REITs established (or legislated) in over 21 countries.

There has been substantial growth particularly in Asia (Japan, Singapore, Hong Kong,

Malaysia, Korea) and Europe (France, UK). Table 1.1 shows the status of global

REITs and the size of REIT markets in the various countries. However, the global

REIT market has been severely affected by the global financial market crisis in 2008,

with the total market capitalisation of listed REITs having declined significantly (eg:

November 2008: US$325bn, October: US$363.6bn, September: US$467.6bn, August:

US$484.9bn).

2

By December 2008, the number of REITs had grown to 509, with a market

capitalisation of US$375.6 billion. In Asia, there were 101 REITs with US$47.1

billion in market capitalisation, representing 12.5% of the global REIT market, with

REITs only being established in Asia in 2001, with the launching of the first Japanese

REIT (Whiting, 2007). Malaysia has 13 REITs and represents 0.3% of the global

REIT market. Within Asia, Malaysia accounts for 2.5% of the Asian REIT market.

One unique development in this REIT area has been the establishment of the world’s

first Islamic REIT in Malaysia in 2006, which include the principles of Shariah - the

body of Islamic law. Importantly, this development is significant, as it is another form

of ethical investment and will increase liquidity and transparency to the international

REIT market; particularly via increased acceptance from Islamic investors globally.

By the end of 2008, there were only three Islamic REITs in the world, with all three in

Malaysia; namely Al-‘Aqar KPJ REIT (hospital properties), Al-Hadharah Boustead

REIT (plantation properties) and Axis REIT (office/industrial properties). Axis REIT,

which was the first Malaysian REIT, has reclassified itself to being an Islamic REIT

in December 2008. By end of December 2008, the total market capitalisation of these

Islamic REITs was US$354.7 million (RM1228.9 million), representing 30% of

Malaysian REIT market capitalisation (APREA, 2009).

The US has the largest percentage of the global REIT market with 52%, followed by

Europe (21%), Asia (13%) and Australia (11%). The top 10 global REIT markets are:

#1: US #2: France #3: Australia #4: Japan #5: UK

#6: Canada #7: Singapore #8: Netherlands #9: Hong Kong

#10: Belgium

Japan dominates the Asian REIT market with US$29.5 billion in market

capitalisation, accounting for 7.8 % of the global REIT market and 62.6% of the

Asian REIT market.

3

Table 1.1 shows the list of REITs with diverse names in various countries and similar

REIT structures around the globe, as well as highlighting the rapid global expansion

of REITs since 2002. The US and Australia have a long history of well-established

REIT markets. Asia/Europe has a recent history which started in 2002, with China

and India still under review. In the future, China and India potentially will be amongst

the largest property suppliers for REITs globally. Table 1.2 presents a general

comparison of REIT structures in selected countries; particularly highlighting

differences in key structural characteristics for REITs. This includes management

structure, gearing limitations, tax transparency and property activities.

Table 1.1: Countries with Existing and Considering REIT-like Structures

Country Name Acronym Introduction

USA Real Estate Investment Trust REIT 1960

Switzerland Fonds de Placement Immobilier FPI 1966

Netherland Fiscale Beleggingsinstelling (fiscalinvestment institution)

FBI 1969

South Africa Property Unit Trust PUT 1969

Australia Listed Property TrustsAustralian Real Estate InvestmentTrusts

LPTA-REIT

19712008

Puerto Rico Real Estate Investment Trusts REIT 1972

Spain Sociedadesde inversión inmobiliaria(Real EstateInvestment Companies)/Fondos deinversión inmobiliaria (Real EstateInvestment Funds)

SII (REIC) /FII (REIF)

1984

Luxembourg Real estate investment fund:fonds commun de placement (collectiveinvestment fund) / sociétéd’investissement à capital variable(variable capital investment company)/fixe (fixed)

REIF:FCP/SICAV/F

1988

Chile Fondo de Inversion Inmobilario FII 1989

New Zealand Listed Property Trust LPT 1993

Canada CanadaReal Estate Investment Trust

CREIT 1993

Brazil Fundos de InvestimentoImobiliário

FII 1993

Malta Professional Investor Funds PIFs 1994

Turkey Gayrimenkul Yatırım Ortaklığı (REIT) REIT 1995

Belgium Société d’ Investissement à Capital FixeImmobilière

SICAFI/Bevak 1995

Costa Rica Fondos de Inversión Inmobiliaros FII 1997

4

Country Name Acronym Introduction

Greece Real Estate Investment Company, RealEstate Mutual Funds

REIC/REMF 1999

Thailand Real Estate Investment Trust REIT 2001

Japan Japanese Real Estate Investment Trust J-REIT 2001

Korea Korean Real Estate Investment TrustCorporate Restructuring REIT

K-REITCR-REITRETF

200120012004

Russia Joint-Stock Investment FundClosed-End Mututal Fund

JSIFCEMF

20012001

Singapore Singapore Real EstateInvestment Trust

S-REIT 2002

Taiwan Real Estate Investment Trust REIT 2003

France Sociétés d’Investissements ImmobiliersCotées

SIIC 2003

Hongkong Hongkong Real EstateInvestment Trust

H-REIT 2003

Austria Immobilien-Investmentfondsgesetz ImmoInvFG 2003

Mexico Fideicomiso Inmobiliario) REIT 2004

Bulgaria Special PurposeInvestment Companies

SPIC 2004

Malaysia Property Trust FundReal Estate Investment Trust

PTFREITIslamic REIT

198920052006

Israel Real Estate Investment Trust REIT 2006

U.K. UK Real Estate Investment Trust UK-REIT 2007

Germany German REIT G-REIT 2007

Italy Società di Investimento ImmobiliareQuotata

SIIQ 2007

Source: NAREIT portfolio magazine, EPRA, Ernst and Young (2007), Pramerica Real EstateInvestrors (2005)

5

Table 1.2 Global REIT Comparison

Characteristics U.S. Australia Netherlands Canada Belgium Singapore Japan France Hong Kong Malaysia Korea Taiwan

Management: Internal or External Either Either Internal Internal Either External External Either Either External Either Either

Real Estate Investments 75%+ 50%+ ofrevenuefrom rent*

100% 80%+ 100% 70%+ 75%+ Flexible 100% <75% 70%+ 75%+

Overseas Investment OK OK OK OK Prohibited OK OK OK OK OK butapprovalsrequired

OK OK butapprovalsrequired

Development OK OK Minimal OK Minimal 20% oftotal assets

OK (but50%+ofassets mustbe income)producing)

Prohibited Prohibited OK (limit to30% of equity)

OK Prohibited

Gearing Limit None None 60%propertyassets

None 50% oftotal assets

35% totalasset***

None None 45% oftotal assets

50% Limit to200% ofequity

35%

Payout 90%+ oftaxableincome(postdeprec.)

100% oftaxableincome(postdeprec.)

100% offiscalearnings

85% ofdistributablecash (pre-deprec.)

80% oftaxableincome andnet debtpaydown

100% oftaxableincome (nodeprec.)

90%+ oftaxableincome(postdeprec.)

85% oftaxableincomefromrentals,50% ofcapitalgains

90% + ofnet incomeafter tax (nodeprec.)

Norestrictions(butundistributedearnings istaxed at 28%)

90%+ ofequity lesscapital andreserve

100% ofdistributableincome(post)expense andreserve)

Closed Ended** Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Closed endedmostly,opened endneed gov.’sapproval

Listed/Unlisted** Both Both Both Listed Listed Listed Listed Listed Listed Both Both Both

Tax Transparency Yes Yes Yes^ Yes Yes^ Yes Yes Yes^ No** Yes Yes Yes+

Notes: * This is a condition of entry into the LPT index, not a regulatory requirement. ^Taxed at source on overseas income and non-exempt activities such as development (France only). ** Not needed as there is no tax ondividends in HK. ^^Currently Germany is the only country with tax transparent option that is unlisted and open ended that is available to both tax paying and tax exempt investors. ***With ›35% with an A rating. ^^^Capital gains from the tax -exempt portion can be distributed in-line with tax treatment of rent. + No tax on capital gain, but 6% on dividend gain. Source: UBS (2007)

6

Given the increasing significance of REITs in Asia and specifically in Malaysia, this

thesis focuses on the significance and performance of REITs in Malaysia from August

2005 to December 2008; particularly focusing on the development, risk-adjusted

performance and portfolio diversification benefits of Islamic REITs in Malaysia, as

well as their investor acceptance.

To further establish this property context, the next segment will discuss property

investment, as property is considered to be a significance asset class, with a unique

role in a diversified portfolio. Property investment can be divided into two

fundamental approaches; direct property (unsecuritised physical asset/ private

property) and indirect property (securitized investment backed by property/ public

property). Different concepts, rules and regulations for investing in property may

apply for every country. Figure 1.1 shows the typical risk-return spectrum for

different types of property investment, while Figure 1.2 shows the profile of

commercial property investment opportunities; with this thesis focusing on REITs in

Malaysia.

Figure 1.1: Risk-return Spectrum of Commercial Property Investment

Opportunities

7

Figure 1.2: Profile of Commercial Property Investment Opportunities

Commercial Property Investment

Direct Property

Core Property

Indirect Property

Redeemable Unredeemable(Syndicates)

Market priced(Listed)

Appraisal Priced(Unlisted)

OpportunisticProperty

Value AddedProperty

REITs PropertyCompanies

Property SecurityFunds

Unlisted RetailFunds

PropertySyndicates

Direct PrivateFunds

UnlistedWholesale funds

8

1.1.1 Significance of Direct Property

Direct property investment can be achieved when an investor purchases a freehold or

leasehold interest in property, owning the entire property and obtaining full control

over it. Direct property is seen to be a preferable choice in property investment, as it is

a real and tangible asset. Table 1.3 presents the advantages and disadvantages of

direct property investment.

Property types for direct property investment include:

Commercial – Office, Retail, Industrial, Hotels, Leisure / Entertainment,

Other (eg: Healthcare, Self-storage, Agricultural)

Residential- Units/Apartments, Townhouses/Villas, Houses/House and Land,

Serviced Apartments, Retirement, Other (Car parking etc.)

Table 1.3: List of Advantages and Disadvantages of Direct Property

Advantages Disadvantages

Maximum control National benchmarks

available Scope for customised

strategies Partnering with specialists can

widen opportunities Flexibility over leverage :

zero to 100% Maximise diversification

benefits from equities etc Purity of investment Diversification benefits,

compared to shares and bonds Directional control over

property Low management fees Ability to add value to

portfolio Low risk Hedge against inflation

Avoid specific risk, ie, need 15+properties on entry and exit

Make administration costs effective Trading and set up costs high especially

if going cross border Risks around choosing a manager

because of variability in returns Liquidity : it takes time to build a direct

exposure but better than private indirecton exit

Limited liquidity High entry and exit costs Indivisibility High capital cost per unit Requires active management No central clearing house Lengthy transaction times Performance is valuation-based (i.e. not

transaction-based) Some degree of inefficiency in market Possible lack of supply of quality

propertySource: IPE (2005), Newell (2009)

9

1.1.2 Significance of Indirect Property

Indirect property is generally considered to be a financial asset. Indirect property

investment can be achieved when an investor purchases units in a pooled investment;

thus gaining partial ownership of the property (i.e. shares in property company, REIT,

property trust or any company specialising in property dealings). Investors do not

have full control over this ownership, although they will obtain liquidity aspects of a

property asset. Investors will receive financial returns without having to use

substantial capital on purchasing. Tables 1.4, 1.5 and 1.6 show the advantages and

disadvantages of indirect property investment for these various property investment

vehicles.

Types of indirect property investment include:

Real Estate Investment Trust/Property Securities Funds – Real Estate

Investment Trust or Company (REIT)

Unlisted Property Trusts - Unlisted Wholesale Fund, Unlisted Retail Fund

Other Unlisted Entities- eg: Direct Private Fund

Mortgage Securities/Mezzanine Funds & Debentures -Mortgage Scheme

Debentures, Mortgage Fund Pooled, Mortgage Scheme Select

Property Investment Schemes Syndicates-Property Investment Schemes,

Strata Title Scheme, Direct Property Syndicates

10

Table 1.4: Advantages and Disadvantages of Indirect Property


Low entry and exit costs High liquidity High divisibility Proper disclosure re: ASX guidelines Ability to spread risk Portfolio diversification via sector specific

property trusts Access to high quality or “trophy” property

assets Not reliant on valuations for pricing

determination Ability to enhance returns via market

timing Abundant supply Efficient market place Potential arbitrage opportunities Can be passively managed Benefits of specialized/sector specific

management Traded on stock exchange (i.e. centralized

clearing house)

Reduced portfoliodiversification benefits,as performance is highlycorrelated with shares

Minority unitholdershave lack of control

High asset managementfees

Impact of debt and cashlevels on purity ofinvestment

Impact of short-termismre: reported performanceanalysis (e.g.: monthly)

Source: IPE (2005)

Table 1.5: Private/Unlisted Property


Diversified exposure Access to expert management Range of styles-core, value-add

and opportunistic Some benchmarks

(APUT/HSBC in UK, INREVemerging Europe)

High correlation with directproperty returns

Negligible control Higher fees/management costs Liquidity: limited with closed-end

funds; open-ended funds subject torisk that investors will all want toredeem at the same time so forcingthe manager to make a queue

Choice restricted to the funds openfor investment.

Risks around choosing a managerbecause illiquidity increases if theperformance is poor

Most funds employ leverageSource: IPE (2005)

11

Table 1.6: Listed Securities in a REIT Structure


Diversified exposureAccess to expert management

National, regional and globalbenchmarks

Good liquidity & transparency Reasonable choice to pursue a

number of different strategies

No control Higher fees/management costs

(pay twice) Higher correlation with equity

markets and less with direct(is public securities real estate?)

Most companies employ leverage Immaturity of market in Europe

and lack of REITsSource: IPE (2005)

In Asia, the traditional indirect property investment vehicle has been via listed

property companies. This has changed significantly in recent years with the

introduction of REITs in several countries in Asia; including Malaysia.

1.2 General Significance of the Malaysian Economy and Commercial Property

Markets

To establish the significance of Malaysia for this thesis, this section gives a snapshot

of Malaysia’s economy and commercial property markets. Both aspects will be

further expanded in a subsequent chapter of this thesis.

Malaysia is one of Asia’s emerging property markets and offers significant property

investment opportunities. Malaysia’s land law ownership registration (except for the

land system in the East Malaysian State of Sabah) is based on Australia’s Torrens

system, while courts are based on English common law. English is a second language

in Malaysia and is widely spoken. Accompanied with a high literacy rate of 91.5%,

according to the United Nations Development Programme's Human Development

Index for 2008, this makes the country a preferred choice of place to live in. Tables

1.7 and 1.8 show the economic and financial profile of Malaysia. Malaysia’s

competitiveness position is favourable in these various international rankings, with

best performance in the Global Services Location Index and weakest performance in

the KOF Index of Globalization.

12

Table 1.7: Economic and Financial Profile of Malaysia: 2008

GDP: 397.5 billion (2008 est.)

GDP growth: 5.5% (2008 est.)

GDP sectors: agriculture (9.7%), industrial (44.6%), services (45.7%)(2008 est.)

GDP growth forecasts: -1.8% (2009), 1.9% (2010)

Inflation: 5.8% (2008 est.)

Industrial production growth: 4% (2008 est.)

Unemployment: 4% (2008 est.)

Labour force: 11.2 million (2008 est.)

Exports: $195.7 billion f.o.b. (2008 est.)

Imports: $156.2 billion f.o.b (2008 est.)Source: CIA (2008), WEF (2008), The Economist (2008)

13

Table 1.8: Global Competitiveness of Malaysia

IMD World Competitiveness Yearbook 2008: 19 (out of 55)

AT Kearney Global Retail Development Index 2008: 13 (out of 30)

AT Kearney Global Services Location Index 2007: 3 (out of 40)

World Bank Doing Business 2008: 20 (out of 181)

Economic Freedom of the World 2008: 72 (out of 141)

Index of Economic Freedom 2009: 58 (out of 183)

KOF Index of Globalization 2008: 24 (out of 80)

World Economic Forum: Global Competitiveness Index 2008-2009: 21 (out of 134)

Economist Intelligence Unit: E-readiness 2008: 34 (out of 70)

The Economist Intelligence Unit: Global Peace Index 2007-2008: 37 (out of 140)

Transparency International: Corruption Perceptions Index 2008: 43 (out of 180)

Yale University: Environmental Performance Index 2008: ranked 27 (out of 150)Source: various international rankings

Even with the economic slowdown in 2008 (GDP has growth around 6% per annum

in 2007), there is major growth potential in Malaysia’s commercial property markets.

In particular, Malaysia offers both conventional and Islamic financing. Increased

competition between banks is likely to force down lending margins, which will have

an impact on property valuations. Islamic financing has increased international

interest in Malaysian property, particularly from major investors in the Middle East.

In addition, the property market in Malaysia has attracted international investors. In

2006, Malaysia accounts for 49.05% of property ownership in Malaysia while the rest

are owned by foreign investors from Singapore (7.96%), United Kingdom (6.69%),

United States (6.1%), Australia 4.65%, Hong Kong (2.64%), United Arab Emirates

(2.01%), Canada (1.48%), Japan (1.2%) and India (1.09%) (Doug Pierce, 2007).

14

Table 1.9 shows the commercial property transactions in Malaysia in 2008 in an

overall Asia context, while Table 1.10 shows the breakdown on Malaysia’s

commercial property sales by property market sector; highlighting the significance of

Kuala Lumpur.

Table 1.9: Commercial Property Transactions in Asia: 2008

Country Transactionvalue (mil.)

Percentage ofglobal market

World ranking(by $)

Percentage ofAsia market

China $52,775 10.48% 2 40.49%

Japan $32,544 6.46% 4 24.97%

Singapore $9,213 1.83% 13 7.07%

Hong Kong $8,736 1.73% 15 6.70%

South Korea $9,106 1.81% 14 6.99%

Taiwan $4,192 0.83% 22 3.22%

India $6,051 1.20% 17 4.64%

Malaysia $3,502 0.70% 25 2.69%

Asia (Other) $4,208 0.84% 3.23%

Total Asia $130,325 25.87% 100.00%

Total Global $503,742

Source: Real Capital Analytics (2009)

Table 1.10: Breakdown of Malaysia’s Commercial Property Sales by Market:

2008

Sector Kuala Lumpur Malaysia otherVol.($mil) # transactions Vol.($mil) # transactions

Industrial 11 1 31 3

Office 1624 17 181 5

Retail 419 2 118 3

Hotel 0 0 61 3

Dev Site 160 6 636 8

Total 2214 26 1027 22


15

1.2.1 Significance of REITs in Malaysia

Since the new issuance of REIT guidelines in 2005 and coupled with tax incentives,

REITs in Malaysia are seen to have a positive outlook following their wider

acceptance and increasing attention from institutional investors. Revised guidelines

have allowed more flexibility in terms of management, acquisition and borrowing

limits, while the inclusion of Islamic REITs in 2006 has encouraged participation of

international investors.

To further strengthen the M-REIT context, this is under-pinned by a strong local

commercial property market in Malaysia. Despite the global financial crisis, office

and retail markets managed to attain a post-stage (low but increasing vacancy rates)

position in 2008, with an increase in rent momentum. Meanwhile, the industrial

market is at growth stage (low and declining vacancy rates stage) with a stable rent

momentum (RREEF Research, 2009).

The office sector in Malaysia still has the capability to attain lower vacancy rates,

which decreased from 8.5% to 7.1% in 4Q:2008 in the Golden Triangle and CBD,

Kuala Lumpur (JLL, 2009) accompanied with an average rising rental rate of RM

7.10 psf. (US$2.05 psf.) per month, an increase of 9.2% (q-o-q) and 19.3% (y-o-y)

(CBRE, 2008). Although, Grade A vacancy rate fell by 80 bps to 6.9%, net absorption

was a positive 919,000 sf. for the fourth quarter of 2008. Unfortunately, retail rent

dropped, as the Consumer Sentiment Index fell from 88.9 points to 71.4 points in the

fourth quarter of 2008. It is also projected for the office and retail sectors to be under

contraction with a decrease in rent momentum until 2010. However, the industrial

sector will be in post-growth condition, with a stable rent momentum until 2010. This

indicates that industrial REITs could still generate a good return for investment.

Tables 1.11, 1.12 and 1.13 shows the strong performance of the office, retail and

industrial property markets in Malaysia in an Asia context.

16

Table 1.11: Asia Office Market Performance: 2008

Out-perform Average Under-PerformSeoul

SydneyMelbourne

TokyoOsaka

YokohamaNagoyaBeijing

Shanghai (Pudong & Puxi)Guangzhou

TaipeiKuala Lumpur

Bangkok

Hong KongSingapore

ManilaMumbai

New DelhiBangaloreChennai

Source: RREEF Research (2009)

Table 1.12: Asia Retail Market Performance: 2008

Out-Perform Average Under-PerformShanghaiSydney

Melbourne

SeoulTokyo

Kuala LumpurTaipei

Hong KongSingapore

BeijingBangkok

New DelhiMumbai


Table 1.13: Asia Industrial Market Performance: 2008

Out-perform Average Under-PerformMelbourne Sydney

TokyoSeoulTaipei

Kuala LumpurBangkokBeijing

Shanghai

SingaporeHong Kong


17

1.3 Objectives of Study

This PhD research will examine the development, performance and impact of

Malaysian REITs in the local, Asian and global REIT investment market; particularly

focusing on Islamic REITs in Malaysia. This issue is important as REITs have

emerged as a topic of considerable interest to the academic community, international

investors, policy makers and the public at large; particularly with the recent

significant development of REITs in Asia in recent years. The main feature of this

thesis is the introduction and role of Islamic REITs as conventional REITs have been

studied vastly.

The objectives for this research are:

1. To compare the structure and regulation of Malaysian REITs with other

countries; both in Asia and internationally and differentiate the structure

between Malaysian conventional M-REITs and Islamic M-REITs

2. To develop an Malaysian REIT performance index and a sub-sector Islamic

M-REIT performance index and identify the impact of the Global Financial

Crisis on Malaysian REIT performance by analysing the risk-adjusted returns

performance for Malaysian REITs and Islamic M-REITs and analysing the

portfolio diversification benefits of Malaysian REITs and Islamic M-REITs in

a mixed-asset portfolio

3. To conduct an investment industry survey to identify the problems, challenges

and the possible solutions relating to a successful Malaysian REIT market.

4. To identify Malaysian REITs prospects by determining the strategy for its

further strategic development and investor acceptance.

This thesis aims to contribute to the development of a Malaysian REIT index, since a

Malaysian REIT performance series is currently not available. This will provide

investors and fund managers with more information about the returns on Malaysian

REITs. Furthermore, the development of the first Islamic M-REIT index in this thesis

will open greater opportunity and attract more Islamic investors in the future.

18

There are limitations in this research due to the short time series of Malaysian REIT

data. Even though Malaysian Property Trust Funds (PTF) data has existed since 1989,

REITs in Malaysia were only listed in August 2005, while an Islamic REIT in

Malaysia was only listed in August 2006. This research acknowledges that there is not

the equivalent extensive time series of performance data for Malaysian REITs that

typically can be used for empirical analyses for the traditional REIT markets of

Australia and US. This shorter time series is clearly evident for all research involving

REITs in Asia, given they have only been established since 2002. Whilst the

performance data may not cover a full investment or property cycle, this limitation is

recognized, and should not be considered to be an impediment to a rigorous and

insightful PhD research study seeking to enhance our understanding on the strategic

contribution of M-REITs in a global REIT context.

The key issue in this thesis is to develop Malaysian REIT performance indicators and

to do the analyses over August 2005- December 2008 for Malaysian REITs to provide

the basis for future research regarding the risk-adjusted performance, portfolio

diversification benefits and strategic development of Malaysian REITs as a successful

REIT product in Asia. The associated investors’ survey will see a much richer and

informed analysis than that just provided by the empirical performance analysis. This

research aims to contribute to and expand on the existing research on REITs;

particularly concerning the significance of Malaysian REITs and Islamic REITs.

Appropriate research questions and methodology used for analysis will be discussed

further in the next section on literature review. Literature review is the critical

component to see the understanding of relevant literature. The next section will

summarize the body of knowledge in this field including the major research questions,

techniques employed as well as their limitations. This will motivate the proposed

study by how it hopes to contribute to this body of knowledge.

19

1.4 Literature Review

1.4.1 Property in a Portfolio

This chapter will discuss the literature on international property research and REITs.

The major focus will be on the Asia property research; specifically Malaysian REITs.

Direct and indirect commercial property have been a major component of the global

investment universe (PREI, 2005) and property is seen to be an alternative asset due

to its inherent characteristics and relative immaturity in some developing markets

(RREEF, 2007). Direct property has consistently been found to be an effective hedge

against inflation in the US (Fama and Schwert, 1977; Hartzell et al, 1987; Gyourko

and Linneman, 1988; Rubens et al, 1989; Wurtzebach et al, 1991; Liu et al, 1997),

U.K. (Limmack and Ward, 1988; Matysiak et al, 1996; Liu et al, 1997), Australia

(Newell, 1996), New Zealand (Newell and Boyd, 1995), Canada (Newell, 1995),

Hong Kong (Ganesan and Chiang, 1998) and Singapore (Sing and Low, 2000). An

empirical study of the inflation-hedging characteristics of the four Chinese major

cities found the contrary, where direct property in these cities was not an effective

hedge against inflation (Chu and Sing, 2004). The widely accepted finding of

Wurtzebach et al (1991) concludes that direct property is a good hedge against

inflation when the vacancy rate is low, and failed as an inflation hedge when the

vacancy rate is high.

The role of direct property in mixed-asset portfolios is well documented. In one of the

earliest studies on direct property as a separate asset class in a mixed-asset portfolio,

Webb et al (1988) found that not only should property be included in a mixed-asset

portfolio, but also approximately two-thirds of the investment wealth should be

allocated to property. Subsequent studies by Ennis and Burik (1991), Hamelink and

Hoesli (1996), Ziobrowski and Ziobrowski (1997), Byrne and Lee (1997) also

confirmed mixed-asset portfolios containing direct property and financial assets

always dominated the financial assets portfolio and the allocation of property in a

mixed-asset portfolio is 15% to 30%. However, when the property data were

desmoothed to factor in appraisal bias, the portfolio diversification gain was reduced.

Despite the favourable findings of numerous studies, the actual allocation for property

in institutional investors’ portfolios is substantially lower than the suggested level

20

(Geltner and Miller, 2001). When the market imperfections of direct property such as

indivisibility and no short sales are taken into consideration (Kallberg et al, 1996) and

the allocation to property is evaluated in the framework of asset-liability (Craft,

2001), the lower allocation of property in institutional investors’ portfolios is justified.

Meanwhile, indirect property have been found to be a poor hedge against inflation in

the US (Gyourko and Linneman, 1988; Liu and Mei, 1992; Liu et al, 1997), U.K.

(Hoesli et al, 1997; Liu et al, 1997), Australia (Newell, 1996), Hong Kong (Ganesan

and Chiang, 1998) and Singapore (Sing and Low, 2000).

The indirect property market was found to lead the direct property market, indicating

indirect (securitised) property reflects information on prices quicker than direct

property appraisal values (Barkham and Geltner, 1995, 1996). As such, Stevenson

(2001) suggested that property trust vehicles might be used as a short-term market-

timing device. This is perhaps the greatest potential benefit for a property fund

manager considering REITs and other property trust vehicles as portfolio assets. The

higher volatility found in the REIT sector is always going to mean that risk-adjusted

asset allocation results are going to be biased towards direct property; however, such

tests will not accurately pick up the short-term market timing benefits that investors

could obtain. In such a case, a portfolio manager could use individual funds both to

switch the property exposure of the portfolio and to use REIT vehicles to gain access

to markets where there are limited property investment opportunities

Liang and McIntosh (1998) and Newell and Tan (2003) have provided evidence for

the diversification benefits of including REITs/LPTs in a mixed-asset portfolio. By

investigating the style and exposure of REITs, Liang and McIntosh (1998) concluded

that REITs have become more “unique” and consequently REITs should be included

in a mixed-asset portfolio to achieve a better risk-return trade-off, despite the styles of

REITs changing over time. However, Glascock et al (2000) found REITs were

cointegrated with direct property and argue that there was no role for REITs in

portfolio risk reduction. Despite the contrary evidence of Glascock et al (2000), it is

widely accepted that both REITs/LPTs (indirect property) and direct property warrant

an allocation in mixed-asset portfolios.

21

Studies reveal the improvements of portfolio diversification benefits by including

international property in a mixed-asset portfolio (eg: Bardhan et al, 2008; Hoesli et al,

2004; Bond et al, 2003; Ling and Naranjo, 2002; Conover et al, 2002; Steinert and

Crowe, 2001; Wilson and Okunev, 1996; Wilson and Zurbruegg, 2003; Worzala and

Sirmans, 2003), while Asian property markets have been proven to be more effective

than European property markets in international diversification (Bond et al, 2003).

Studies have shown international diversification benefits by investing into the Asian

property markets (eg: Bond et al, 2003; Garvey et al, 2001; Liow and Adair, 2009),

with property companies in Asia showing long-term diversification benefits (Garvey

et al, 2001). Property performance has also been specifically examined in selected

Asian countries; namely Singapore (eg: Liow, 2000, 2001a, 2001b; Ong, 1994, 1995;

Sing and Low, 2000), Hong Kong (eg: Newell and Chau, 1996; Schwann and Chau,

2005), India (eg: Newell and Kamineni, 2007). Major factors also contributing to this

increased international property exposure have included the need for portfolio

diversification, potential for higher returns, lower cost of capital and favourable

exchange rates (Worzala and Newell, 1997).

Recent research have examined various aspects of property performance in Asia (eg:

Bond et al, 2003; Jin et al, 2007; Liow, 2007, 2008; Liow and Adair, 2009; Liow and

Sim, 2006; Ooi and Liow, 2004; Wilson et al, 2007; Wilson and Zurbruegg, 2004)

Numerous papers have assessed the significance of Asian property companies,

including Liow (2000, 2001, 2008), Liow and Adair (2008), Liow and Sim (2006),

Newell and Chau (1996).

In terms of financial performance, Liang and McIntosh (1998) concludes direct

property should be classified as a different asset class with indirect property. Other

studies (Gyourko and Linneman, 1988; Liu et al, 1990) indicates that direct property

is uncorrelated with indirect property, while other studies found that they are linked to

one another by common property factors (Giliberto, 1990; Liu and Mei, 1992;

Gyourko and Keim, 1992).

22

1.4.2 REITs

1.4.2.1 REITs in US

Previous research on REITs has been extensive. The significant research in US REITs

has been reviewed (Corgel, Mcintosh and Ott, 1995; Zietz, Sirmans and Friday 2003).

It has been divided into 4 distinct categories and several subcategories; 1) REITs as

real estate and common stocks, 2) REIT asset acquisitions and dispositions, 3)

restructuring of REITs and 4) asset market information and REIT prices.

Research have shown that US REITs are viewed as hybrid securities (eg: Liu and

Mei, 1992), and REITs are integrated with the stock market (Li and Wang, 1995; Ling

and Naranjo, 1999). After 1992, Clayton and Mackinnon (2003) found equity REITs

behave more like real estate, although Lee, Lee and Chiang (2005) do not support this

finding. In terms of inflation hedging characteristics, Gyourko and Linneman (1988),

Park, Mullineux and Chew (1990), Chan, Hendershott and Sanders (1990), Liu and

Mei (1992) and Liu, Hartzell and Hoesli (1997) perceived REITs as having poor

ability against inflation. There is an indication of inflation-hedging capabilities in

other countries (Liu, Hartzell and Hoesli, 1997) and in the long-term (Goebel and

Kim, 1989). REITs are also seen as ideal for reducing portfolio risk (Goldstein and

Nelling, 1999).

Researchers such as Smith and Shulman (1976), Titman and Warga (1986), and

Goebel and Kim (1989) also suggested that the performance of REITs was worse

than, or comparable to, the market portfolio. Others such as Burns and Epley (1982),

Kuhle (1987), and Sagalyn (1990) found that REITs outperformed the stock market

portfolio. According to Smith and Shulman (1976), 16 REITs in the period of 1963-

1973 and 102 REITs in the period of 1977-1984 (Kuhle and Walther, 1986)

outperformed the S&P index although in 1974, both research conducted suggested

REITs underperformed the S&P index during the recession period. Mixed results

were also reported by Chan, Hendershott and Sanders (1990), and Howe and Shilling

(1990), while Liu, Hartzell, Grissom and Wylie (1990) investigated the sensitivity of

performance measures to the choice of market portfolios. Subsequently, Han and

Liang (1995) in assessment of the long-term performance of US-REITs from 1970 to

23

1993 found that the performance of survivors-only samples may not be a good

representation of the performance of the overall REIT industry.

Newell and Fife (1995) report that based on the REITs analysed for the period of

1980 to 1995, the success of US REITs was contributed to by the improved

management structures and benefits of the Tax Reform Act 1986 which allows REIT

owners to own and manage properties. In corporate restructuring, mergers provide

significant wealth increases for the acquiring REIT shareholders especially with

similar portfolio of assets (Allen and Sirmans, 1987). In term of dividends, REITs pay

out high dividends than mortgage REITs (Chan, Erickson and Wang, 2003) and other

regular REITs and firms with fluctuating dividends will be penalised (Kallberg, Liu

and Srinivasan, 2003).

1.4.2.2 A-REITs in Australia

LPTs was the previous name for REITs in Australia, which were rebadged as A-

REITs in 2008. Research has shown that LPTs have been a successful indirect

vehicle; largely because of its tax transparency and investor acceptance. LPTs account

for 40% of institutional property exposure compared to 20% in mid to late 1980s.

Newell (2005) observed and documented these past studies and used a variance

decomposition procedure to assess the proportion of LPT volatility that is attributable

to stock, bond and property factors over 1985-2004. The dynamics of this LPT

performance is also assessed. Property is seen to only make a small contribution to

LPT variability, with the contribution of property only marginally increasing in recent

years with the increased maturity of the LPT sector. The importance of stocks in LPT

performance has decreased significantly, with bonds being the most dominant

component in LPT performance in recent years.

The success of A-REITs has also been examined in specific research on performance

analysis issues (Lee et al, 2007, 2008; Newell, 2006; Newell and Peng, 2006; Newell

and Tan, 2003, 2004; Peng, 2004; Tan, 2004a, 2004b; Ratcliffe and Dimovski, 2007),

as well as IPO or financing issues (Chikolwa, 2007, 2008; Dimovski and Brooks,

2006a, 2006b, 2007) and investor acceptance (Newell, 2007a, 2007b, 2008). In terms

24

of fund manager decision making (Newell and McIntosh, 2007; Newell and Peng,

2008; Tan, 2004c, 2004d). According to Ratcliffe and Dimovski (2007), there is an

increase in the market risk profile of LPTs, suggesting an erosion of the defensive

benefits of LPTs against stockmarket volatilities. The study also finds that the degree

of financial leverage has a positive and significant impact on the level of market and

interest rate risk for LPTs. There is also some evidence that the level of diversification

across different property types reduces market risk.

1.4.3 REITs in Asia

Recent years have seen improvement in maturity and transparency in many

international commercial property markets in Asia (Chin and Dent , 2006; Chin et al,

2006; JLL, 2008) which have led to the introduction of Asian REITs in recent years

(Chin et al, 2006; JLL, 2008; Ooi et al, 2006; Lin, 2007). Although research on Asian

property companies has been extensive, research on Asia REITs is limited. Given the

recent establishment of REITs in Asia, only limited research has been conducted in

this increasingly important area; this includes Chiang et al (2008), Kutsuna et al.

(2008), Lin (2007), Ooi et al. (2006), and Quek and Ong (2008); largely concentrating

on developmental and IPO aspects of REITs in the larger REIT markets in Asia;

namely Japan, Singapore and Hong Kong. Ooi and Newell (2005) examined the

different background of Asian REIT markets, while Kutsuna, Dimovski and Brooks

(2008) have assessed the success of the J-REIT IPO market, which have influenced

the legislation and listing of other Asian REIT markets. From 2001 to 2006, the J-

REIT market reported a 0.5% average underpricing, which was not a statistically

different to zero underpricing. Chua and Kitamura (2004) showed that the

development of Japan REITs was supported by the improved transparency of the

property market and the development of non-recourse loans and a low interest rate

which is close to zero. Meanwhile, in Singapore and Korea, higher entrance

thresholds and restrictions on borrowing have constrained their REIT development.

Carr, Dimovski, Newell, Ooi and Yap (2009) assessed the REIT IPO underpricing in

3 Asian countries; Singapore, Hong Kong and Malaysia. The study reveals the mean

25

underpricing for 34 REIT IPOs from 2000-2007 is 5.77%, which is the highest

amongst the published Singapore and Malaysia REIT literature to date.

1.4.4 M-REITs in Malaysia

Earlier research on Malaysian property markets was on property companies, largely

concerning the role of Malaysian property companies in a pan-Asia context (Liow,

2008; Liow & Adair, 2009; Liow & Sim, 2006; Newell, Liow, Ooi & Haihong, 2005),

board composition issues (Shakir, 2008a, 2008b, 2009), capital structure (Ameer,

2007; Mahmood & Zakaria, 2007), sustainability issues (Newell & Manaf, 2008) and

corporate real estate (Ting, Nassir, Newell and Hassan, 2006). Published evidence on

the performance of listed property trusts in Malaysia is very limited. REITs/LPTs

were established in Malaysia in 1990 as property trust funds (PTFs), but were not

successful due to restrictive LPT market conditions and the restrictive Guidelines on

Property Trust Funds (Ting, 2002; Foong, 2005). Kok and Khoo (1995) examined the

performance and the systematic risk of three PTFs, namely Arab Malaysian First

Property Trust, First Malaysia Property Trust and Amanah Harta Tanah PNB, over the

January 1991-April 1995 period. The PTFs did not give consistent performance over

time. The systematic risks of the listed property trusts were low before the period of

over-speculation. However, after the period of over-speculation, the systematic risks

were higher than those of the market. They also discovered that the systematic risk

rankings of the listed property trusts were not consistent over time.

Newell, Ting and Acheampong (2002) analysed the performance of four Malaysian

property trusts, over the 1991-2000 period. Based on a coefficient of variation

measure, they concluded that PTFs in Malaysia underperformed other competing

investment vehicles such as shares. Other factors contributing to this lesser

performance include a low level of institutional investors’ participation (Ting, 2000),

thin volume of trading, too small market capitalisation of LPTs in Malaysia, slow

capital appreciation, poor historical returns of LPTs, low dividend yield compared to

other investment options, low fluctuation in returns, lack of portfolio management

expertise in LPTs and non-performing of the property sector (Lee, Hishamuddin and

Lee, 2005). This has seen the Malaysian government revive their REIT regulations in

26

2005 to stimulate the REIT market in Malaysia, resulting in a surge in the

establishment of REITs since 2005.

An online survey was conducted by Latham Consulting between 20th November 2007

and 16th December 2007. Their survey was distributed to senior, very experienced

and well respected property professionals, ranging from Fund Managers (31%),

Property Professionals (28%), Lawyers/Tax/Accounting professionals (22%) and

Merchant Bankers/Property owners (18%) from 49 companies in 6 key countries. The

sample quality of respondents are exceptional, with 98% having spent their time

residing or working in Asia, while 60% worked with international companies.

According to the report prepared by Trust, the objectives of the survey were to

understand the perceptions and attitudes of key stakeholders in the region of the

relevant REIT markets. They have presented the results from all respondent for their

survey by converting the five-point ratings scale to an index where 100 equals the

average score. From 11 countries, Malaysia has improved its rank from 8 to 7 (5%

increase in index) for ‘Overall Potential’ and from 6 to 5 for ‘Regulatory Support’

(+7%), while maintaining the same rank for ‘Property Market Growth’ (+1%) and

‘REIT Opportunity’ (+7%).

Several factors may have affected the performance and development of REITs in

Malaysia such as market size, advisor type, tax rate, interest rate, inflation rate and

institutional investor participation. In Malaysia, M-REITs have a low level of

institutional investor participation. In particular, the average annual unit holdings of

institutional possession for the sample period of 1989 to 1997 were 3.43% (Ting,

2000). A study conducted by Lee, Hishamuddin and Lee (2005) inspected the lack of

interests from institutional investors to REITs. The study surveyed 21 of 57 senior

fund managers which 10% are from insurance companies, 24% from asset

management and 66% from unit trusts. Results from the study suggest that

institutional investors have poor perception of LPTs in Malaysia. In Malaysia, trading

volume was found as the most important factor for lack of interest in M-REITs

followed by small market size of LPTs, slow capital appreciation, poor historical

returns of LPTs, low dividend yield compared to other investment types, low

fluctuation in returns, lack of management expertise and property sector not

performing well. Yaakop Yahaya Al-Haj and Hashim (2007) support the findings by

27

Lee, Hishamuddin and Lee (2005) which found that trading volume is the most

important factor that attracts institutional investors to invest in REITs.

On the other hand, an analysis by Ting (2000) of the annual stock turnover ratio

demonstrated that the transactional activities of REITs are low. The mean annual

stock turnover ratio of 0.33 for the 1990 to 1997 period contrasts poorly against the

ratio of other sectors of Bursa Malaysia. This shows poor demand and interest from

Malaysian investors on REIT stock. The unstable dividends declared by LPTs may

also have an affect on investor’s lack of interest on LPTs (Ting, 2007). This research

aims to examine the Malaysian REIT market and investors participation which will be

discuss in detail in the next chapters.

The only research specifically on M-REITs assessed the development of Islamic M-

REITs (Osmadi, 2006), and the risk-adjusted performance and portfolio

diversification benefits of Islamic M-REITs in a portfolio over 2006-2008;

particularly contrasting the performance of Islamic M-REITs and conventional M-

REITs over this period and during the global financial crisis (Newell and Osmadi,

2009). Overall, Islamic M-REITs were seen to be a differentiating property

investment product from conventional M-REITs, as well as displaying the defensive

characteristics of low risk levels and portfolio diversification benefits. The robustness

of these characteristics were further enhanced during the GFC (Newell and Osmadi,

2009). Ibrahim and Ong (2008) have assessed Islamic REITs by establishing synthetic

Shariah-compliant US REIT portfolios to assess their risk-adjusted performance

against the broader US REIT sectors and the 'cost' of Shariah-compliance. An

assessment by establishing synthetic Shariah-compliant A-REIT portfolios to assess

their risk-adjusted performance against the broader A-REIT sectors and the 'cost' of

Shariah-compliance is yet to be discovered. In order to understand how well the M-

REIT company performs, an analysis which provide the financial and management

strength statistics and ratios will be conducted as financial strength is one of the most

critical measures of the worth of an investment (the other two are stability and

growth) and buying companies with high management quality (Dynaquest). Greater

detail on these statistics will be analysed further in the following chapters.

28

A survey to assess the importance of factors influencing the future development of M-

REITs was conducted over October – December 2007. The survey addressed a range

of factors influencing the future development of M-REITs. These factors were

identified by a literature review of the development of REITs in Asia (eg: Ooi et al.,

2006) and an assessment of previous REIT surveys conducted by one of the authors.

These factors comprehensively covered the areas of M-REIT structure, tax, regulatory

environment, industry structure, investor acceptance, property market environment,

property performance and individual property-specific issues.

Previous empirical research has generally found no significant differences between

the risk-adjusted performances of Islamic stocks versus non-Islamic stocks. This has

included studies concerning the US (e.g. Girard & Hassan, 2008; Hakim & Rashidian,

2002; Hussein, 2004; Hussein & Omran, 2005), UK (Kok, Giorgioni & Lewis, 2009)

and Malaysia (e.g. Abdullah, Hassan & Mohamad, 2007; Ahmad & Ibrahim, 2002;

Albaity & Ahmad, 2008; Sadeghi, 2008; Yusof & Majid, 2006, 2007). The results of

these Islamic stock studies are consistent with similar studies involving the more

general aspects of the performance of ethical portfolios (e.g. Sauer, 1997) and socially

responsible investing (e.g. Guerard, 1997; Kreander, Gray, Power & Sinclair, 2005).

There was also some evidence of Islamic stocks out-performing conventional stocks

(e.g. Abdullah et al., 2007; Hussein & Omran, 2005); particularly in a bear market.

While specialist stock sub-sectors are often expected to under-perform the overall

market, as they represent a smaller investment universe and have less potential

diversification (Albaity & Ahmad, 2008), these empirical studies showing no

evidence of under-performance by Islamic stocks have major investment implications.

In particular, they highlight the inclusion of shariah investment principles in

investment portfolios as delivering comparable risk-adjusted performance to

conventional investment portfolios. This performance is further reinforced as Islamic

stock portfolios require debt screening to achieve debt levels not exceeding 33%.

29

Research in this area is important as a number of the major global property fund

managers now have significant Asia property portfolios in their global property

mandates. This includes ING, RREEF, UBS, LaSalle and Pramerica, accounting for

over €33 billion in total in property assets under management in Asia (Gray, 2009).

Additionally, the development of REITs have proven to benefit investors in mature

markets (diversification benefits, property development, higher yield and total return),

banks (new IPO business, advisory on acquisitions and new lending opportunities),

property fund managers (expanded range products), other professionals real estate

agents, valuers, accountants (new business opportunities).

In June 2006, Gordon Brown Chancellor of the Exchequer for the UK government

would want to see London become the global centre for Islamic finance by offering

regulatory and tax regime measures to support the creation of products that comply

with Shariah law. The money from Muslim countries is estimated to be somewhere in

the region of 300-400 billion annually, growing at a rate around 15% per year. Angus

McIntosh, Head of research at King Sturge says one of the first REITs in UK may be

a Shariah compliant REIT (Property Australia, December 2006/January 2007). The

increased appetite for property investment by Middle East sovereign wealth funds

(e.g. Abu Dhabi Investment Authority, Kuwait Investment Authority, Qatar

Investment Authority) is expected to be a significant source of capital for Islamic

property funds (Deutsche Bank, 2007; DTZ, 2008; RREEF, 2008).

30

Shariah-compliant property investment in Asia has been identified as having high

potential, with Malaysia clearly seen as the most favoured market due to its political,

institutional and legal frameworks being conducive to Shariah-compliant property

investment (Ibrahim et al., 2009). Cross-border investing is also higher in Malaysia

(49% of 2008 transactions) than for Asia (27%) and globally (31%), with major

global property investors having significant Malaysian commercial properties in their

pan-Asia portfolios (e.g. ING). This sees Malaysia accounting for 0.8% of global

property companies and 1.6% of property companies in Asia (Macquarie Securities,

2009). Malaysia was not as adversely affected by the global financial crisis as most

other Asian markets (Newell and Razali, 2009), as well as Malaysia being one of the

most transparent property markets in Asia, only exceeded by Hong Kong and

Singapore (JLL, 2008). M-REITs is seen to be less impacted from GFC and gave a

total return of -18% in 2008, compared with REITs in Japan (-37%), Singapore

(-56%), US (-38%), Australia (-65%) and UK (-59%) (Macquarie Securities, 2009;

S&P, 2009).

SC have revised guidelines to encourage the growth of M-REITs, enhance their

attractiveness, attract foreign investors and encourage foreign REITs to list in

Malaysia (Securities Commission of Malaysia, 2008). These measures included

increased maximum gearing levels, improved tax arrangements (eg: reduced

withholding tax), improved foreign ownership conditions (eg: 100% of foreign

ownership of funds management), reduced Bumiputra ownership conditions, more

flexibility in property acquisitions, and improved reporting and disclosure (Trust,

2009). Overall, these new guidelines have been seen to be a stimulus to the M-REIT

market; particularly concerning increased foreign involvement (CB Richard Ellis,

2009). This has seen M-REITs rated as the #2 REIT market in Asia for future REIT

opportunity and the #3 REIT market in Asia for overall potential (Trust, 2009).

31

With Malaysia at the centre of Islamic financial services in Asia, Islamic M-REITs

have been shown to be well-suited as an Islamic financial product to achieve listed

property exposure with a number of local players expected to set up M-REITs in the

near future (e.g. Sunway, YTL). The Malaysian government has also refined the M-

REIT model and recently liberalised foreign investment restrictions to increase

overseas investor interest amongst REIT fund managers and those seeking to list as an

M-REIT. CapitaLand (Singapore) and Ezden (Qatar) have already expressed interest

as international players in setting up an M-REIT with improved market conditions in

the future.

In particular, Islamic M-REITs are a part of the Malaysian government's 10-year

Capital Markets Masterplan to enhance the international competitiveness of the

Malaysian capital markets (Trust, 2008). This has already seen Middle East investor

participation in M-REITs (e.g. Kuwait Global Investment House acquired a 4% stake

in Amanahraya REIT) (CBRE, 2009), with increased overseas Islamic bank activity

in M-REITs expected. At a local level, the major Malaysian pension fund (Employees

Provident Fund) currently has over RM7 billion managed by Islamic fund managers,

with this EPF fund now potentially able to effectively access the Shariah-compliant

Islamic M-REIT market. This demand is further reinforced by Islamic banking being

expected to account for 50-60% of the total savings of the world's 1.2 billion Muslims

by 2015 (RICS, 2006), as well as the continued active property investment role by

many of the Middle East sovereign wealth funds. This capital availability is also

expected to see strong demand for Islamic property investment opportunities in

countries with significant Muslim populations in Asia (e.g. Indonesia, India) and

Europe (e.g. Turkey) (RREEF, 2008).

32

This research should also open an opportunity for the the development of Waqaf

REIT as an ethical investment. Waqaf is a form of islamic charity that has been going

around globally in Muslim countries i.e Singapore and Indonesia. An example of

Waqaf in Malaysia is when recently JohorCorp donated shares from its land

development for their Waqaf Corporate. Since land is a scarce resource, it is best to

make full use of unused land to gain profit for further use in other charities.

Islamic REIT as one method of ethical investing (other than Green Buildings etc) may

open the opportunity to the development of Waqaf REIT as another form of ethical

investing. REIT allows investors to own a portion of a property without the issue of

managing the properties themselves. Islamic REITs have a similar structure but also

allow muslim investors to own a portion of 'halal' income producing properties as

stated through the Islamic REIT guidelines. Although a Waqaf REIT has not yet been

developed, Waqaf REIT is possibly an act where a person donates their land to be

developed and managed by a REIT company for the benefit of mankind. The land

donated for waqaf to can be used to build facilities for health, religious and

educational purposes to develop the economy and improve the welfare of society.

33

1.5 Organisation of the Thesis

The organization of this thesis is as follows:

Chapter 1: Introduction

In chapter 1, the general introduction focusing on the objectives and organisation of

the thesis framework will be made. This also includes a brief discussion on the overall

context on the significance of direct property and indirect property and a general

overview on the significance of Malaysian commercial property markets and M-

REITs. This chapter will also provide the literature review on general property

portfolio issues and REITs. Whilst a global context is provided, it will focus more on

the literature concerning REITs in Asia and specifically in Malaysia.

Chapter 2: Global Real Estate Investment Trusts and Property Trust

Vehicles

Chapter 2 will provide details of the global REIT status and details of the

development of specific REIT markets. Particular focus will be on the Asian REIT

market.

Chapter 3: Significance of Malaysian Commercial Property Markets

Chapter 3 will focus on the Malaysian commercial property market and Malaysian

REIT market. This will outline the Malaysian property market universe (size, property

ownership structure, direct property, indirect property, global investor interest),

economic activity and population. Malaysian commercial property in an Asia context

will also be discussed. An extended discussion on property ownership structures will

be presented. The subject matter includes reviewing Malaysian property companies,

listed property companies, Malaysian Property Trust Funds and Malaysian Real

Estate Investment Trusts (structure, characteristics, comparison, performance, issues

and future opportunities). Case studies of all 13 M-REITs (AHP, AHP2, Axis REIT,

Starhill REIT, UOA REIT, Tower REIT, Hektar REIT, AmFirst REIT, Quill Capita

Trust, Amanahraya REIT, Atrium REIT, Al-‘Aqar KPJ REIT, Al-Hadharah Boustead

REIT), which include overall M-REIT portfolio diversification by type and region,

operating platform and financial analysis will also be detailed in Appendix VII. A

34

section on the introduction to Islamic finance and Islamic REITs will also be included

in this chapter. This is essential for the understanding of the background and

framework of Islamic law in finance and it’s growing market and the establishment of

Islamic M-REITs.

Chapter 4: Methodology

Chapter 4 will focus on details of the methodology being used in the thesis and on the

methodology used for the M-REIT index development. This will comprise both the

conventional M-REIT index and Islamic M-REIT index. The second section of this

chapter will explain the methods used to analyse the performance of M-REITs and the

other asset classes, while the third section will discuss the methods in analysing the

M-REIT survey conducted. Data limitations will also be highlighted.

Chapter 5: M-REIT Performance Analysis

Chapter 5 will examine the M-REIT performance analysis which includes risk-

adjusted returns and portfolio diversification benefits for overall and conventional M-

REIT analysis from August 2005 to December 2008 and for Islamic M-REIT analysis

from August 2006 to December 2008. The significance of M-REITs and Islamic M-

REITs in a mixed-asset portfolio will also be discussed.

Chapter 6: M-REIT Surveys

Chapter 6 will focus on the survey results that have been generated from interviews

and distribution of questionnaires to Malaysian REIT managers, property advisors and

fund managers in Malaysia. Comparison between the survey results of these three

designated property groupings will be analysed and the investor implications will be

highlighted.

35

Chapter 7: Summary

Chapter 7 will state conclusions and summarize the contributions of this research, as

well as identifying the limitations of this research and future research opportunities

regarding M-REITs.

36

CHAPTER 2

GLOBAL REAL ESTATE INVESTMENT TRUSTS AND

PROPERTY TRUST VEHICLES

2.1 Global Status of REITs and Property Trust Vehicles

A REIT is a listed company which largely manage income-producing real estate and

allows investors to have a partial interest in the property via this listed entity. US-

REITs and A-REITs are the most developed REIT markets globally. Although

property companies have been significant in the Asian stock market, REITs are

gaining popularity in Asia with increased growth of Asian REITs and increased

attractiveness in tax structure among individual and institutional investors. As such,

this chapter will provide details of the global REIT status and details of the

development of specific REIT markets. Particular focus will be on the Asian REIT

market. The impact of the Global Financial Crisis may have dampened the growth and

performances of the global REIT sector (see Table 2.1) but a total of 78 cities around

the globe recorded $1 billion or more commercial property sales in 2008. Malaysia

emerged as one of the countries in Southeast Asia with a $1 billion market (Real

Capital Analytics, Feb 2009). Although the Global Financial Crisis sees a decreasing

growth of REITs for the first half of 2008 in several countries, several countries in

Asia including Malaysia have increased its number of REITs from 11 in 2006 to 13 in

2008.

37

Table 2.1: Growth of REITs

Global region Country 2008 2007 2006

North America United States 148 169 253

Canada 33 26 33

EMEA Netherlands 8 7 9

Belgium 14 17 13

Germany 2 n/a n/a

France 48 42 30

Turkey 13 15 n/a

United Kingdom 19 14 n/a

South Africa 6 7 7

Pacific Australia 64 58 58

New Zealand 8 10 6

Asia Japan 42 41 38

Hong Kong 7 7 4

South Korea 6 6 11

Malaysia 13 13 11

Singapore 20 16 11

Total 451 448 484

Source: Ernst & Young, 2008

The following section firstly puts REITs in a global context regarding property

markets and listed property securities. Table 2.2 below illustrates the significance of

total property market by country and regions with the total real estate globally reached

$19,347 billion in 2007 and $1,134.9 billion worth of total listed real estate by April

2009 (EPRA, 2009).

38

Table 2.2 Global Real Estate Universe: 2009

Country 2007 Real

Estate ($ Bn)

30 Apr. 09

Total Listed

($ Bn)

30 Apr. 09

Total RE v

Listed RE (%)

30 Apr. 09

Stock Market

($ Bn)

30 Apr. 09

Stk Mkt v

Listed RE (%)

United States 5904 352.0 5.96 9391 3.75

United Kingdom 1387 54.0 3.89 1793 3.01

Germany 1359 15.0 1.10 878 1.71

France 1050 58.0 5.53 1215 4.77

Italy 866 6.0 0.69 440 1.36

Australia 333 110.0 33.02 659 16.70

Japan 1994 159.0 7.97 2711 5.87

Hong Kong/China 640 164.0 25.63 3669 4.47

South Korea 384 1.0 0.26 483 0.21

India 157 8.0 5.10 600 1.33

Taiwan 139 4.0 2.88 425 0.94

Singapore 126 41.0 32.45 228 17.99

Malaysia 50 0.7 1.40 176 0.40

Total Asia-Pacific 4056 499.0 12.30 9254 5.39

Total Europe 7818 221.1 2.83 7350 3.01

Total Latin America 177 25.1 14.21 776 3.24

Total Africa/Middle

East

836 1.7 0.20 1482 0.11

Total North America 6460 388.0 6.01 10354 3.75

Total World 19347 1134.9 5.87 29216 3.88

Source: FTSE EPRA/NAREIT Global Real Estate Indices

Globally, US has the largest real estate by country in 2007 with $5,904 billion

followed by Japan #2 ($1994 billion), United Kingdom #3 ($1387 billion), Germany

#4 (1359), France #5 ($1050 billion), Italy #5 ($866 billion), Hong Kong/China #6

($640 billion) Spain #7 ($571 billion), Canada #8 ($557 billion), South Korea #9

($384 billion) and Australia #10 ($333 billion) in top 10. This sees only 3 Asian

countries (Japan, Hong Kong/China and South Korea) in the top 10 largest real estate

markets globally for 2007. Significantly, the US dominates the global real estate

market at 31% of the total global real estate while by region; Europe represents the

39

largest real estate market globally with 40%. Within Europe, the four largest markets,

Germany, UK, France and Italy represents 29% of the total global real estate market.

In the top 10 largest real estate among Asian countries, Japan has the largest real

estate in 2007 with $1994 billion followed by Hong Kong/China #2 ($640 billion),

South Korea #3 ($384 billion), India #4 ($157 billion), Taiwan #5 ($139 billion),

Singapore #6 ($126 billion), Indonesia #7 ($70 billion), Thailand #8 ($52 billion),

Malaysia #9 ($50 billion) and Philippines #10 ($23 billion). Asia Pacific represents

30% of the global real estate market with Asia Developed excluding Australia

represents 14.3% of the global real estate market. Malaysia represents 0.3% of the

global real estate market.

Table 2.3 shows the annualised returns for listed property companies by country as of

December 2008. Overall, the REIT market generates negative return for 2008. For the

2008 returns, the global REIT market generates a negative return of -49% with

Norway (-92%) having the worst performed property market among developed

countries. Focusing in Asia, Thailand generates -57% return followed by

Taiwan (-41%), Malaysia (-41%), Hong Kong (-54%), Japan (-34%) and Singapore

having the lowest return of -57%.

40

Table 2.3: Listed Property Company Performance as at December 2008

1 year 3 year 5 year 10 year

Developed

Australia -65.73% -20.44% -6.30% 2.21%

Austria -84.90% -46.69% -29.05% -12.46%

Belgium -21.55% 1.68% 5.99% 6.10%

Canada -53.79% -16.11% -1.74% 6.82%

Denmark -63.42% -24.04% NA -14.14%

Finland -56.45% -11.78% -0.07% 7.34%

France -38.34% 1.54% 13.38% 14.43%

Germany -60.75% -23.36% -5.77% -2.45%

Greece -58.09% -8.83% NA NA

Hong Kong -53.65% -2.16% 6.09% 5.08%

Italy -64.34% -30.14% -10.11% 2.62%

Japan -34.16% -9.85% 8.88% 7.07%

Netherlands -37.09% -0.01% 8.62% 10.95%

New Zealand -41.17% -7.08% 1.53% NA

Norway -92.38% NA -40.37% -18.95%

Singapore -57.34% -1.95% 11.34% 5.15%

Spain -74.11% -27.89% -2.55% 2.55%

Sweden -35.58% -3.00% 11.53% 18.57%

Switzerland -5.32% 7.12% 9.96% 7.73%

United Kingdom -61.25% -24.95% -6.49% 2.96%

United States -38.77% -11.74% 0.35% 7.35%

Source: Quarterly Report Global Property & REIT S&P 4Q 2008

41

Table 2.3: Listed Property Company Performance as at December 2008 (cont.)



Emerging

Argentina -71.28% -28.51% -15.40% -4.41%

Brazil NA NA NA NA

Chile -60.64% -9.81% 0.68% 4.24%

China -58.54% 18.14% 18.42% 19.22%

Egypt -73.23% -6.29% NA 8.51%

India -85.67% NA NA NA

Indonesia -41.51% 3.01% 14.79% 34.31%

Israel -74.69% -19.97% 1.31% 8.54%

Malaysia -41.22% 13.78% 7.78% 7.25%

Philippines -61.45% -4.65% 7.23% -0.98%

Poland -74.31% -6.55% NA NA

South Africa -29.00% -0.08% 17.83% NA

Taiwan -41.08% -5.03% 3.11% -10.24

Thailand -57.31% -2.09% -13.72% NA

Turkey -71.00% -35.14% NA NA


Regions

Americas -40.15% -12.16% 0.10% 7.19%

Emerging markets -60.43% 0.95% 6.35% -1.43%

Emerging Asia-Pacific -61.75% 6.05% 4.95% -2.96%

Emerging European -73.91% -15.05% NA NA

Global -48.85% -11.69% 1.51% 6.36%

Global Excl. U.S. -52.98% -11.31% 2.76% 5.71%

Latin America -64.87% -19.27% -5.83% -3.60%

Mid-East and Africa -47.17% -6.85% 12.66% 6.74%

Pan Asia -52.76% -9.23% 3.96% 4.91%

Pan Asia Excl. Japan -59.46% -8.95% 1.63% 3.92%

Pan Europe -54.35% -16.71% -0.79% 5.88%

42

For the top 10 global listed real estate markets by country in April 2009, US has the

largest listed real estate market with $352 billion followed by Hong Kong/China #2

($164 billion), Japan #3 ($159 billion), Australia #4 ($110 billion), France #5 ($58

billion), United Kingdom #6 ($54 billion), Singapore #7 ($41 billion), Canada #8

($36 billion), Spain #9 ($18 billion) and Germany #10 ($15 billion). Significantly, the

US dominates the global listed real estate market at 31%.

In the top 10 largest real estate markets listed among Asian countries in April 2009,

Hong Kong/China has the largest real estate listed with $164 billion followed by

Japan #2 ($159 billion), Singapore #3 ($41 billion), India #4 ($8 billion) while

Taiwan, Thailand and Philippines at #5 with $4 billion followed by South Korea

($1 billion), Malaysia ($0.7 billion) and Indonesia ($0.1 billion). By region; Asia

Pacific represents the largest listed real estate market globally with 44% with Asia

Developed excluding Australia represents 32% of the global listed real estate market.

Malaysia represents 0.06% of the global listed real estate market.

Table 2.4 shows the significance of listed property securities markets in Asia. By

December 2008, the global property securitisation had a market capitalisation of £653

billion comprising of 2068 companies in 66 countries. The global status of property

securities are dominated by Asia developed (£221.5 billion), followed by Americas

developed (£166.3 billion), Europe developed (£101.4 billion), Asia emerging (£70.4

billion), Middle East & Africa emerging (£46.6 billion), Oceania developed (£31.4

billion), Americas emerging (£10.0 billion) and Europe emerging (£5.8 billion).

43

Table 2.4: Significance of Listed Property Securities Markets in Asia:

December 2008

Country Numberof

propertysecurities

Marketcap.

(US$ b)

Percentageof Asiamarket

Percentageof globalmarket

Worldranking

(bypound)

Hong Kong 126 175 41.4 18.5 2

Japan 163 107 25.3 11.3 3

Singapore 62 39 9.2 4.1 7

China 78 56 13.2 5.9 4

India 38 16 3.8 1.7 10

Taiwan 47 6 1.4 0.6 26

Malaysia 84 9 2.1 0.9 18

Philippines 35 7 1.5 0.7 24

Thailand 51 4 0.9 0.4 29

Indonesia 40 4 0.9 0.4 29

South Korea 7 0.3 <0.1 <0.1 45

Vietnam 5 0.7 0.2% <0.1 42

Sri Lanka 17 0.1 <0.1 <0.1 52

Total Asia 753 422 100.0 44.7

Total Global 2068 943 100.0

Source: Macquarie Securities (2009)

By region, Asia led as the largest market capitalisation which accounts for 44.67% of

the global listed real estate securities market. Asia emerging market ranked number 4

ahead of other emerging market and Oceania Developed. By country listing, the top

10 markets hold 79.6% of the global listed real estate securities market with US in the

lead with 22.58% followed by Hong Kong (18.53%), Japan (11.27%), China (5.89%),

France (4.9%), Australia (4.6%), Singapore (4.10%), UK (3.15%), Canada (2.87%)

and India (1.71%). Malaysia held 0.91% of the global listed real estate securities

market. This shows the significance of Asian property securities with 5 Asian markets

in the top 10 during the global financial crisis. Although the 12 month return

performance of the global property securities generate a negative return by December

2008, the developed markets (-49.7) performed better than the emerging market

44

(-65.2%), with Asia Developed (-54.8) performed better than Oceania Developed

(-55.3%) and Asia Emerging (-66.8%) performed better than Europe Emerging

(-82.6%).

By December 2008, the market capitalisation for REITs globally have reached £260

billion with 509 REITs in 21 countries with the largest region Americas (54.6%)

followed by Europe (21.2%), Asia (12.5%), Oceania (11.1%) and Middle East and

Africa (0.7%). In comparison to regions, Asia has seen increased maturity and has

seen as a large component which accounts for US$47.1 billion above; Australia

(US$40 billion). Table 2.5 shows the global REIT market by end of December 2008.

Amongst the global REIT markets, US have the largest REIT market in the world

with Hong Kong, Japan, Singapore and being the only Asian REIT markets in top 10.

The US has the largest percentage of the global REIT market with 52%, followed by

Europe (21%), Asia (13%) and Australia (11%). The top 10 global REIT markets are:

#1: US #2: France #3: Australia #4: Japan #5: UK

#6: Canada #7: Singapore #8: Netherlands #9: Hong Kong

#10: Belgium

45

Table 2.5: Global REIT Market: December 2008

Source: Bloomberg, Macquarie Equities Research, Jan. 2009, RBA (31st Dec. 2008: 1 GBP = 1.445USD)

Listing Country Number ofREITs

Sector Mkt CapUS$ bn

% of GlobalREIT Mkt

Asia 101 47.1 12.5

Hong Kong 7 5.9 1.6

Japan 41 29.5 7.8

Singapore 20 8.4 2.2

Malaysia 13 1.2 0.3

South Korea 6 0.3 0.1

Taiwan 8 1.4 0.4

Thailand 6 0.3 0.1

Americas 204 205.0 54.6

Canada 33 11.7 3.1

US 171 193.3 51.5

Europe 124 79.4 21.2

Belgium 14 5.3 1.4

France 47 43.2 11.5

Germany 2 0.4 0.1

Italy 1 0.4 0.1

Netherlands 8 7.8 2.1

UK 18 20.7 5.5

Bulgaria 19 0.3 0.1

Greece 2 0.6 0.1

Turkey 13 0.7 0.2

Oceania 75 41.6 11.1

Australia 67 39.9 10.6

New Zealand 8 1.7 0.5

Middle East & Africa 5 2.5 0.7

South Africa 5 2.5 0.7

Global REITs 509 375.6 100.0

46

Table 2.6 shows the top 50 largest REITs globally. At December 2008, Westfield

Group from Australia has the largest REIT globally, although by country, the US

dominates the top 10 of the largest REITs globally with seven US-REITs. The other

three REITs which made it in the top 10 are Unibail-Rodamco from France (#3) and

Land Securities Group PLC from UK (#10). Overall, there are 27 US-REITs in the

top 50 of the largest REITs globally with a market cap of US$127,943 million which

accounts for 56% of the largest REITs globally in the top 50.

There were only five A-REITs in the top 50 of the largest REITs globally at

December 2008, namely Westfield (#1), Stockland (#16), CFS Retail (#28), GPT

(#31) and Dexus (#44). The total market capitalisation for all A-REITs in the top 50

of the largest REITs globally is US$17,123 million which accounts for 7.5% of the

largest REITs globally in the top 50.

In Europe, only REITs from UK, France and Netherlands made it in the top 50 of the

largest REITs globally at December 2008. There were only four UK-REITs in the top

50 of the largest REITs globally at December 2008, namely Land Securities Group

PLC from UK (#10), British Land Co PLC (#19), Liberty International PLC (#33),

Hammerson Plc (#40). The total market capitalisation for all UK-REITs in the top 50

of the largest REITs globally is US$15,012 million which accounts for 6.6% of the

largest REITs globally in the top 50. Meanwhile, there were only seven REITs from

France in the top 50 of the largest REITs globally at December 2008, namely Unibail-

Rodamco (#3), Gecina SA (#18), ICADE (#20), Klepierre (#21), Fonciere Des

Regions (#32), Mercialys (#38) and Altarea (#47). The total market capitalisation for

all REITs from France in the top 50 of the largest REITs globally is US$31,429

million which accounts for 13.7% of the largest REITs globally in the top 50. There

were only 2 REITs from Netherlands in the top 50 of the largest REITs globally at

December 2008, namely Corio NV (#30) and Wereldhave NV (#50). The total market

capitalisation for all REITs from Netherlands in the top 50 of the largest REITs

globally is US$4,868 million which accounts for 2.1% of the largest REIT globally in

the top 50.

47

Table 2.6: Top 50 Largest REITs Globally: December 2008

Listing Country Company Name Market Cap US$m Sector Type

Australia Westfield Group 17,769 Retail

US Public Storage 13,556 Industrial

France Unibail-Rodamco 12,073 Office, Retail

US Simon Property Group Inc 11,891 Retail

US Vornado Realty Trust 9,232 Office, Residentia1, Retai1

US Annaly Capital Management Inc 8,514 Mortgage REIT

US Equity Residential 8,040 Residential

US HCP Inc 6,954 Healthcare, Retirement Housing

US Boston Properties Inc 6,586 Hotel, Office, Retail

UK Land Securities Group PLC 6,190 Office, Retail

Japan Nippon Building Fund Inc 5,882 Office

US Plum Creek Timber Co Inc (REIT) 5,743 Agricultural

US Kimco Realty Corp 4,825 Retail

US Ventas Inc 4,767 Healthcare, Retirement Housing

US AvalonBay Communities Inc 4,630 Residential

Australia Stockland 4,481 Industrial, Office, Residential, Retail, Retirement Housing

US Health Care REIT Inc 4,326 Healthcare, Retirement Housing

France Gecina SA 4,286 Healthcare, Hotel, Logistic, Office, Residential

UK British Land Co PLC 4,069 Industrial, Leisure, Office, Retail

France ICADE 4,048 Healthcare, Industrial, Logistic, Office, Residential, Retail

France Klepierre 4,023 Industrial, Office, Retail

US Host Hotels & Resorts Inc 3,920 Hotel

Japan Japan Real Estate Investment Corp 3,913 Office

US Prologis 3,658 Education, Healthcare, Industrial, Office, Residential, Retail

US Federal Realty Invs Trust 3,629 Retail

Hong Kong The Link REIT 3,542 Parking, Retail

US Regency Centers Corp 3,240 Retail

48

Table 2.6: Top 50 Largest REITs Globally: December 2008 (continued.)

Listing Country Company Name Market Cap US$ m Sector Type

Australia CFS Retail Property Trust 3,195 Retail

US Piedmont Office Realty Trust Inc 3,062 Office

Netherlands Corio NV 3,058 Industrial, Office, Retail

Australia GPT Group 2,870 Hotel, Industrial, Office, Retail, Retirement Housing

France Fonciere Des Regions 2,784 Healthcare, Hotel, Industrial, Leisure, Office, Parking, Residential, Retail

UK Liberty International PLC 2,513 Office, Residential, Retail

Canada RioCan Real Estate Investment Trust 2,451 Office, Retail

US Rayonier Inc 2,448 Agricultural

US Realty Income Corp 2,392 Retail

US Digital Realty Trust Inc 2,376 Industrial, Office

France Mercialys 2,353 Retail

US AMB Property Corp 2,287 Industrial

UK Hammerson Plc 2,240 Office, Retail

US Liberty Property Trust 2,222 Industrial, Office

US Essex Property Trust Inc 2,038 Office, Residential

US Senior Housing Properties Trust 2,034 Healthcare, Retirement Housing

Australia Dexus Property Group 1,991 Industrial, Office, Parking, Retail

Japan Nomura Real Estate Office Fund Inc 1,957 Office, Retail

US Alexandria Real Estate Equities Inc 1,927 Laboratory, Office

France Altarea 1,862 Leisure, Residential, Retail

US United Dominion Realty Trust Inc 1,861 Residential

Singapore CapitaMall Trust 1,829 Retail

Netherlands Wereldhave NV 1,810 Industrial, Office, Parking, Residential, Retail

US Weingarten Realty Investors 1,785 Industrial, Land, Retail

Source: Bloomberg, Macquarie Research, January 2009

49

In Asia, only REITs from Japan, Hong Kong and Singapore made it in the top 50 of

the largest REITs globally at December 2008. There were only three J-REITs in the

top 50 of the largest REITs globally at December 2008, namely Nippon Building

Fund Inc (#11), Japan Real Estate Investment Corp (#23) and Nomura Real Estate

Office Fund Inc (#45). The total market capitalisation for all J-REITs in the top 50 of

the largest REITs globally is US$11,752 million which accounts for 5.1% of the

largest REITs globally in the top 50.

The Link REIT (#26) is the only HK-REIT in the top 50 of the largest REITs globally

at December 2008, with a total market capitalisation of US$3,542 million which

accounts for 1.5% of the largest REITs globally in the top 50 while CapitaMall Trust

(#49) is the only S-REIT in the top 50 of the largest REITs globally at December

2008, with a total market capitalisation of US$1,829 million which accounts for 0.8%

of the largest REIT globally in the top 50. There are no M-REITs in the global top 50

REITs.

Table 2.7 shows the impact of the Global Financial Crisis in 2008 REIT returns by

country. The performance metrics are expressed in total returns and for the 1-, 3-, 5-

and 10–year performance, are all expressed in annual return. Overall, the REIT

market generates negative returns for 2008. For the 2008 returns, the global REIT

market generated a negative return of -45%, with Australia having the lowest return of

-65% followed by UK (-59%), Canada (-49%), US (-38%), France (-37%) and

Netherlands (-35%). Focusing on Asia, Thailand generated 0% return followed by

Taiwan (-9%), Malaysia (-18%), Hong Kong (-29%), South Korea (-36%), Japan

(-37%) and Singapore having the lowest return of -56%.

50

Table 2.7: Global REIT Market Performance to December 2008



Developed

Australia -64.84% -20.01% -6.06% 3.62%

Hong Kong -28.49% -4.83% NA NA

Japan -37.09% -5.55% 2.57% NA

New Zealand -41.17% -7.08% 1.53% NA

Singapore -56.14% -6.31% 7.85% NA

Belgium -20.94% 1.57% 6.05% 6.79%

France -36.77% 1.82% 13.86% NA

Netherlands -35.46% 0.59% NA NA

United Kingdom -59.10% NA NA NA

Canada -49.11% -9.38% 3.59% 8.63%

United States -38.33% -11.26% 0.65% 7.51%

Emerging

Turkey -67.58% NA NA NA

South Africa -34.79% -4.94% NA NA

Regions

Emerging Markets -29.63% -4.98% NA NA

Global -45.04% -12.16% 0.03% 7.13%

Global Excl. U.S -51.56% -12.98% -0.45% 6.30%

Mid-East and Africa -34.79% -4.94% NA NA

Pan Asia x Japan -60.89% -17.08% -3.86% 4.86%

Pan Europe -47.32% -11.03% 2.46% 7.62%

Pan Asia 54.91% -13.55% -1.71% 5.91%

51

Table 2.8 shows list of Asian REITs ranked by market capitalisation with Nippon

Building Fund Inc. from Japan having the highest market capitalisation US$5.772

billion and UOB Apartment Property I having the lowest market capitalisation of

US$0.01 billion. By December 2008, the total number of Asian REITs increased to

115 with a market capitalisation of US$48 billion which accounts for 12.5% of the

global REIT. Only 5 Asian REITs made it in the top 50 of the largest REIT globally;

namely Nippon Building Fund Inc (#11), Japan Real Estate Investment Corporation

(#23), Link Reit (#26), Nomura Real Estate Office Fund (#45) and Capitamall Trust

(#49). By region, the Asia Developed REITs dominate the Asian REIT market with

US$44 billion in market capitalisation, accounting for 11.6% of the global REIT

market and 93% of the Asian REIT market, while Asia Emerging REITs are a lesser

components of the Asian REIT market with US$4 billion in market capitalisation,

accounting for 0.9% of the global REIT market and 7% of the Asian REIT market.

Japan dominates the Asian REIT market with US$29 billion in market capitalisation,

accounting for 7.8% of the global REIT market and 62.6% of the Asian REIT market,

while Singapore comes in second with US$9 billion in market capitalisation,

accounting for 2.2% of the global REIT market and 17.8% of the Asian REIT market.

Starhill Real Estate Investment Trust (#45) is the only Malaysian REIT in the top 50

of Asian REIT ranked by market capitalisation at US$0.2483 billion.

The following sections will discuss briefly the different REIT markets around the

world, starting with the largest REIT markets followed by other regions. More focus

will be given to the Asian REIT market to compare the Malaysia REIT market with

its neighbouring countries. Appendix VI details other REIT markets beside Malaysia.

52

2.2 Malaysia REITs

Malaysia was the first Asian country to develop a REIT market. It was previously

known as PTFs in 1986. Malaysia used the Australian LPT model to set up the

regulatory framework, although there are some different aspects to the structure. This

is mainly because of the ‘bumiputra’ rules which restrict foreign ownership in favour

of indigenous people of Malaysia. The first regulatory framework was approved by

Bank Negara Malaysia (the Central Bank of Malaysia), with the regulatory principles

governing their establishment and operation being the Companies Act 1965 and the

Securities Industry Act 1983 (Rozali and Hamzah, 2006). Later, the Securities

Commission (SC) became the regulator when it was formed. Specific Guidelines on

PTFs were introduced by the SC in 1991 and later revised in 1995 and 2002.

Unfortunately, from 1989 to 2005, the PTF industry performed poorly (Ting, 1999;

Newell, Ting and Acheampong, 2002; Osmadi, 2007). The regulatory structure was

still restrictive. During these periods, only subsidiary companies of financial

institutions were permitted to set up and manage such funds. Before the inception of

M-REITs in August 2005, only 3 PTFs were listed in the Kuala Lumpur Stock

Exchange (KLSE); namely AmFirst Property Trust (AMFPT), Amanah Harta Tanah

PNB (AHP) and Amanah Harta Tanah PNB 2 (AHP2). Other factors which have

contributed to the poor performance of PTFs were the lack of prime properties and

quality assets in their property portfolios. Even with the availability of these

properties, the borrowing limits and the long acquisition period have depleted the

interest to the parties involved (i.e. investors and property owners).

The poor performance of Malaysian PTFs, together with the successful development

of REIT-like structures in other countries (e.g. Australia and US), encouraged

government and regulators to enhance the existing PTF framework. In the 2005

budget, the Malaysian Government introduced further improvements to its REIT-like

structure which included a more tax transparent structure. However, the tax

transparency in Malaysia is not as attractive as being offered by other countries in the

region (eg: Singapore).

53

Among the new requirements include directing REIT managers to appoint a

designated person responsible for compliance. It also allows a portion of a REIT

portfolio to consist of real estate that it does not wholly-own or have a majority

ownership. REITs would not be allowed to acquire non-income generating real estate

such as vacant land, and may only acquire property that was under construction or

uncompleted real estate up to 10 per cent of its total asset value. REIT managers are

allowed to seek a general mandate from unit holders for issuance of units up to 20 per

cent of its fund size. The SC's prior approval on the real estate valuation is now only

required where acquisition of real estate is financed, or re-financed within one year,

through the issuance of new units.

By end of December 2008, more initiatives from the government have given a boost

to the M-REIT market. Foreign ownership of fund management companies and REIT

management companies has been given up to 70 percent with minimum Bumiputra

ownership remaining at 30 percent. This is an increase from 49 percent since 2005.

Islamic fund management companies have also been allowed to be wholly owned by

foreigners and invest all assets abroad. A RM7 billion fund has been channeled by

EPF (Employee Provident Fund) to be managed by Islamic fund management

companies. This has seen as a good approach, especially as Malaysia now has three

Islamic REITs; namely Al-Aqar KPJ REIT, Al-Hadharah Boustead REIT and Axis

REIT converted to an Islamic REIT in December 2008.

Key regulation and legislation on M-REITs include:

the Securities Commission Act 1993;

the Securities Industry Act 1983;

the Finance Act 2004;

the Guidelines on Real Estate Investment Trusts issued 3 January 2005;

the Guidelines for Islamic REITs issued 21 November 2005;

the Guidelines on Compliance Function for Fund Managers issued 15 March

2005;

the Listing Requirements of Bursa Malaysia Securities Berhad (if the REIT is

listed); and Guidance Notes 1 to 7 for Real Estate Investment Trusts issued by

the Securities Commission.

54

At December 2008, REITs in Malaysia consist of 13 REITs (10 conventional REITs

and 3 Islamic REITs), with the total market capitalisation around US$1.1781 billion.

This market is expected to continue to expand. Currently, these Malaysian REITs

cover the office, retail, industrial, hotel, as well as medical centres and plantations

sectors with office and industrial being the major sectors. Fuller details on M-REITs

will be given in the next chapter. Table 2.8 shows the list of M-REITs at December

2008 with Starhill REIT having the highest ranked M-REIT (45) and Amanah Harta

Tanah PNB 2 being the lowest ranked M-REIT (113) in terms of market capitalisation

in Asia.

Table 2.8: Property Profile of Malaysian REITs*: December 2008

Name of REIT Date listed Property Type Market Cap.(US$ mil)

Asia Rank

Amanah Harta Tanah PNB** 28-Dec-90 Commercial, Office, Retail 21.6 108

Amanah Harta Tanah PNB 2** 25-Mar-97 Commercial, Office 14.8 113

Axis-REIT*** 3-Aug-05 Office, Industrial 84.9 78

Starhill REIT 16-Dec-05Hotel, Retail, Servicedapartments 248.2 45

UOA REIT 30-Dec-05 Office, Retail 67.0 85

Tower REIT 12-Apr-06 Office 71.6 84

Al-Aqar KPJ REIT 10-Aug-06 Hospital 107.6 70

Hektar REIT 4-Dec-06 Retail 72.0 83

Amfirst REIT 21-Dec-06 Office 99.6 75

Quill Capita Trust 8-Jan-07 Commercial 101.3 73

Al-Hadharah Boustead REIT 8-Feb-07 Palm oil Plantation 162.2 58

Amanaraya REIT 26-Feb-07Office, Retail, Industrial,College, Hotel 105.2 71

Atrium REIT 2-Apr-07 Industrial 22.1 107

Total Market Capitalisation 1178.1

Source: CBRE (2008), Bloomberg, APREA Research (2 Jan 2009)

*: Islamic REITs shown in bold

**: established as PTFs which subsequently converted to REITs

***: Converted to Islamic REIT in December 2008

55

2.3 Global Properties Securities Funds

As major investors in REITs globally, Global Properties Securities Funds have seen a

rapid growth prior to the GFC, with 150 global property funds having US$51.7 billion

in funds under management in 2007. Table 2.9 presents the leading global property

securities funds in 2007 with 15 funds having in excess of US$1 billion in funds

under management. A significant number of these funds (31%) are global REIT funds

(eg: Nomura Global REIT Fund, DLIBJ DIAM World REIT Income Fund), while

others have a global property mandate (61%) and include both global REITs and

global property stocks in their portfolios (eg: Fidelity Real Estate Investment, ING

Clarion Global Real Estate Income Fund). Others (8%) have restricted global

mandates (eg: Global ex-US, Global ex-Australia. These funds have full global

mandates and do not include those property security funds with more regional

mandates. For example, there are an additional 88 European property funds with

US$23.2 billion in funds under management as well as US-specific, Australia specific

and Asia-specific property securities fund.

These global property funds have been established by most of the leading institutional

property investors (eg: Nomura, ING, ABN Amro, Cohen&Steers, Morgan Stanley).

US (39%), Japan (31%), Luxembourg (10%) and Australia (6%) represent the major

fund domiciles. Large funds dominate the global property securities funds market,

with the top 5 funds accounting for 41% of total assets and the top 10 funds

accounting for 60% of total assets.

The establishment of REITs in Asia provide opportunities for global portfolio

diversification for these global property securities funds. This has seen the

FTSE/EPRA/NAREIT global property securities fund benchmark contain 26.5%.

Asia property securities with the various Asian country levels in this benchmark being

Japan (12.7%), Hong Kong (11%) and Singapore (2.8%). Equivalent levels in this

FTSE/EPRA/NAREIT global benchmark are North America (40.1%), Australia/NZ

(12.4%) and Europe (21.0%).

56

Table 2.9: Global Properties Securities Funds in 2007

Source: Moss and Hughes (2007)

Property securities fund Assets under management(US$ M)

Mandate

Fidelity Real EstateInvestment (US)

9198 Global

Nomura Global REIT Fund(Japan)

5999 Global REIT

DLIBJ DIAM World REITIncome Fund (Japan)

3785 Global REIT

ING Clarion Global RealEstate Income Fund (US)

2119 Global

AMP Wholesale GlobalProperty Securities Fund(Australia)

1949 Global

ABN AMRO GlobalProperty Securities Fund(Netherlands)

1686 Global

Kokusai World REIT Fund(Japan)

1529 Global REIT

DJE Real Estate(Luxembourg)

1428 Global

Cohen & Steers InternationalRealty Fund (US)

1400 Global ex-US

Nikko AMP Global REITFund (Japan)

1384 Global REIT

Worldwide InvestmentPortfolio-Global Real Estate(Luxembourg)

1229 Global

Sumitomo Global REIT(Japan)

1227 Global REIT

Morgan Stanley InternationalReal Estate (US)

1216 Global ex-US

Fidelity International RealEstate (US)

1205 Global

Alpine International RealEstate (US)

1105 Global ex-US

Total of 153 funds 51721

57

2.3.1 Significance of Asia REITs

According to AME Capital, Asian REITs have the strongest growth prospects

compared to other regional property market, due to relative out performance and the

higher level of equity issuance than other regions. Although Asian REITs still need to

develop more in terms of transparency and structure, Asian REITs are still gaining a

lot of interest from individual and institutional investors so as to diversify their

portfolios. Figure 2.1 show the REITs development by country.

Figure 2.1: Macquarie Eclipse REITs Development

Source: Macquarie

58

CHAPTER 3

SIGNIFICANCE OF MALAYSIAN COMMERCIAL

PROPERTY MARKETS

3.1 Significance of Malaysia: Social, Economic Activity and Demographics

Malaysia is a multicultural country, consisting of three majority groups: Malay,

Chinese and Indian. Malaysia has a robust state of economy and finance with a good

and competitive mix of conventional and Islamic finance sector that is well accepted

worldwide. The Malaysian financial system practices the dual banking system;

whereby the Islamic and conventional systems work together. Developments in the

country have progressed extensively with the significant increase of interest by

institutional investors locally and internationally. In property development, property

maintenance is still an issue that needs to be addressed. During the Asian Financial

Crisis, Malaysia is the first country in Asia to recover from the turmoil. Malaysia is

now faced with the global financial crisis and is still recovering from the epidemic

that have resulted in increasing unemployment rate; thus affecting the property sector

as borrowing became too expensive. The increase in unemployment rate to 3.7% has

resulted to decrease in domestic consumption in certain commodities. These have also

resulted in the decrease in property prices and property owners reducing rents for

retailers. Although there is no real property gains tax (which have been reverted in

late 2009), owners still have the opportunity to sell their houses higher than the

original purchase price although they are unable to gain the actual profit. Table 3.1

shows the social, economic and financial profile of Malaysia in 2008.

High commodity prices, stable employment and supportive financing environment

sustained the strong growth in private consumption in the first half-year. Although

private consumption declined in the second half of 2008, growth was still mainly

59

contributed by private consumption and consumer spending of 6.9% with the

government subsidy which are enjoyed by all Malaysians and bonus payment to the

civil workforce. The increase of commodity prices have resulted the external demand

to decrease from 7.1% in the first half to 2.4% in the second half. In terms of global

competitiveness, Malaysia is ranked #21 globally and #6 in Asia while according to

the corruption perception by countries, Malaysia is ranked #47 as least corrupted

country globally and ranked #6 as least corrupted country in Asia.

Table 3.1: Social, Economic and Financial Profile of Malaysia: 2008

Social profile:

Area: 330,000 km2

Population: 25.7 million

Capital: Kuala Lumpur

Languages: Bahasa Malaysia, English, Chinese

Government: Bicameral parliament

Economic and financial profile:

GDP: US$367B

GDP sector: agriculture (9.7%), industry (44.6%), services (45.7%)

GDP growth: 5.1%

GDP growth forecasts: -1.8% (2009), 2.8% (2010)

Inflation: 5.8%

Unemployment: 3.7%

Currency: Malaysia ringgit

Exchange rate: US$1 = RM 3.33

Global competitiveness: #21 (globally); #6 (Asia)

Corruption perception: #47 least corrupt (globally); #6 least corrupt (Asia)

Stockmarket: Bursa Malaysia; $189B market cap; 24th largest stockmarket (globally);

10th largest stockmarket (Asia)

Sources: CIA (2009), JLL (2009), WEF (2008), WEF (2009), TI (2008)

60

The GDP growth for Malaysia (-1.8%) in 2009 is higher than in Singapore (-8.0%)

although by 2010 they are forecast to increase growth by 2.8% (see Table 3.2). The

increased commercial property transaction in Asia (see Table 3.3) together with

economic growth in Malaysia sees Malaysia as a key property player in the region.

Table 3.2: Economic Growth Forecasts for Asia Markets: 2009-2010

Country GDP (%)

2009 2010

Industrial production (%)

2009 2010

Inflation (%)

2009 2010China 6.6 8.1 8.1 9.7 -0.8 0.1

Hong Kong -2.6 3.1 NA NA 1.5 2.1

Taiwan -4.5 3.0 -10.0 5.8 -1.0 1.4

Japan -6.6 0.8 -29.4 13.0 -1.1 -0.7

South Korea -3.5 0.9 -13.3 3.5 1.9 2.3

Philippines -0.1 2.9 -6.9 3.5 4.8 5.5

Singapore -8.0 2.8 -17.4 3.4 -0.2 1.2

Malaysia -1.8 2.8 -11.0 6.7 1.1 1.9

Thailand -2.9 2.8 -12.9 8.0 -0.2 2.7

Indonesia 2.7 3.4 -4.8 4.1 5.7 5.7

Vietnam 3.8 4.5 3.3 8.5 7.2 5.3

India 4.3 5.8 -0.4 3.8 6.2 6.2

World -2.6 1.7 -10.7 3.1 1.5 2.2Source: JLL (2009)

3.2 Commercial Property Market Universe

According to EPRA (2009), the global value of investible commercial property by the

end of 2008 is $19.4 trillion. Europe holds 40% of the global market ($7.8 trillion)

with UK and Germany in the lead with $1.4 trillion followed by France ($1.1 trillion),

Italy ($866 billion) and Spain ($571 billion). US holds 31% of the global market ($5.9

61

trillion) while Canada holds 3% of the global market ($557 billion) and Australia

holds 2% of the global market ($333 billion).

Table 3.3 shows the composition of the RCA commercial property transaction

database for 2007 and 2008 with the global number of property transactions decreased

from 32,228 in 2007 to 16,812 in 2008. Asia increased it’s number of properties from

6.2% globally in 2007 to 12% globally in 2008. The value of transactions in Asia also

increased from 14.2% in 2007 to 25.8% globally in 2008.

Table 3.3: Composition of RCA Commercial Property Transaction Database:

2007-2008

Number ofproperties

Percentage ofnumber ofproperties

Volume oftransactions

(US$)

Percentage ofvalue

transactions2007North America 17,367 53.9% $534B 51.5%Latin America 144 0.4% $5B 0.5%Europe 12,054 37.4% $314B 30.3%Middle East 30 0.1% $2B 0.2%Africa 122 0.4% $2B 0.2%Asia 1998 6.2% $147B 14.2%Australia/NZ 513 1.6% $32B 3.1%Global 32228 100% $1036B 100%

2008North America 6071 36.1% $143B 28.4%Latin America 397 2.4% $12B 2.4%Europe 7857 46.7% $207B 41.1%Middle East 61 0.4% $3B 0.6%Africa 139 0.8% $1B 0.2%Asia 2025 12.0% $130B 25.8%Australia/NZ 262 1.6% $9B 1.8%Global 16812 100.0% $504B 100.0%Source: Real Capital Analytics (2008, 2009)

Globally, the change in percentage of commercial property transactions from 2007 to

2008 is -51%. Selected countries and regions with negative change in percentage of

commercial property transactions from 2007 to 2008 are US (-74%),

62

Australia (-73%), UK (-55%), France (-53%), Germany (-49%), Canada (-43%) and

Europe (-34%). However several country delivered positive change in the percentage

of commercial property transactions from 2007 to 2008; eg: Netherlands (15%) and

Sweden (5%).

The Global Financial Crisis has affected the commercial property transactions which

have reduced the investment of the top 25 cities from a minimum of $8 billion in 2007

to a minimum of $3 billion in 2008. Although by regions, US have reduced its

investment from 56% in 2007 to 40% in 2008, Europe and Asia have increased its

investment from 20% in 2007 to 24% and 36% in 2008 respectively. Major cities

which make the top 25 cities in 2007 are New York (#1), London (#2), Los Angeles

(#3), Tokyo (#6), Singapore (#9), Paris (#10), Hong Kong (#14), Shanghai (#20),

Beijing (#21). 2008 sees a lot of participation from Asia, with New York leading the

cities followed by London (#2), Tokyo (#3), Beijing (#4), Paris (#6), Singapore (#7),

Hong Kong (#8), Shanghai (#11), Seoul (#15), Tianjin (#17), Hangzhou (#21), Osaka

(#24). In terms of the significance of $1 billion transaction markets in 2007, the

number of cities exceeding $1 billion was 114 cities, with Asia accounting for 18%

while in the lead is Americas (46%), followed by Europe (32%) and Australia (4%).

The number of cities exceeding $1 billion in 2008 decreased to 75 cities, with Asia

having an increased importance of 27%. Americas are still leading although in a

decreased percentage of 41% followed by Europe (27%) and Australia (5%).

Jones Lang LaSalle has assessed 82 countries for property market transparency for

2008. Significantly, Canada is the world’s most transparent property market as shown

in Table 3.4 ; being seen as more transparent than the other mature markets of the US,

UK, Australia and New Zealand. In Asia, only Hong Kong and Singapore have been

considered to be highly transparent together with Canada, Australia, US, UK, France.

Table 3.4 shows the transparency of property markets in 2008 in Asia with selected

countries as international benchmarks. In terms of global competitiveness, 134

countries have been assessed by WEF for 2008. Table 3.5 shows global

competitiveness in 2008 among countries in Asia with selected countries as

international benchmarks. Singapore is the only country in Asia which have made the

top 10 most competitive and least corrupt countries. Table 3.6 shows the corruption

perception of countries in Asia with selected countries as international benchmarks by

63

2008. 180 countries were assessed for corruption by TI for 2008, with Denmark, New

Zealand and Sweden as the least corrupted country, with Malaysia standing at 47th

place. Implications of these rankings to the performance of M-REITs is to give

background perspective to countries to investors on which country to invest to

understand risk involve

Table 3.4: Transparency of Property Markets: 2008

Highly transparent:Canada, Australia, US, UK, France, Hong Kong, Singapore

Transparent:Germany, Spain, Italy, Switzerland, Malaysia, Japan

Semi-transparent:Taiwan, South Korea, Thailand, Philippines, China (Tier 1 cities),India (Tier 1 & 2 cities)

Low transparency:Indonesia, India Tier 3 Cities, China (Tier 2 & 3 cities), Vietnam, Macau

Opaque:CambodiaSource: JLL (2009)1. Transparency rating categories comprise 1-1.5 (highly transparent), 1.5-2.5 (transparent), 2.5-3.5(semi-transparent), 3.5-4.25 (low transparency), 4.25-5 (opaque).

Table 3.5: Global Competitiveness Among Countries: 2008

#1: USA #2: Switzerland #5: Singapore #7: Germany#9: Japan #11: Hong Kong #12: UK #13: South Korea#16: France #17: Taiwan #18: Australia #21: Malaysia#30: China #34: Thailand #50: India #55: Indonesia#71: Philippines #70: Vietnam #77: Sri Lanka #109: Cambodia

Source: WEF (2008)

64

Table 3.6: Corruption Perception of Countries: 2008

#1: Denmark, New Zealand, Sweden #4: Singapore#5: Switzerland #9: Australia#12: Hong Kong #14: Germany#16: United Kingdom #18: Japan, USA#23: France #39: Taiwan#40: South Korea #47: Malaysia#72: China #80: Thailand#85: India #92: Sri Lanka#121: Vietnam #126: Indonesia#141: Phillippines #166: Cambodia

Source: TI (2008)

3.2.1 Global Property Investor Interest

There is significance in cross-border investing globally, although it has been reduced

to 31% in 2008 from 32% in 2007. Major property markets experiencing reductions in

cross-border investing are Europe (59% to 47%), US (10% to 9%), Canada (23% to

10%), Australia (59% to 17%), UK (46% to 38%), Germany (71% to 58%), France

(58% to 49%), Sweden (66% to 21%), Netherlands (86% to 23%) and Russia (57% to

36%). Asia reduced its cross-border investing from 37% in 2007 to 27% in 2008. In

2007, Asia (other) leads with the highest percentage of cross-border investing in Asia

with 80% followed by South Korea (66%), Malaysia (54%), China (45%), Singapore

(40%), India (35%), Japan and Taiwan (26%) and Hong Kong (18%) while in 2008,

Singapore leads with the highest percentage of cross-border investing in Asia with

50% followed by Malaysia and Asia (other) (49%), South Korea (%), India (26%),

China (25%), Japan (23%), Taiwan (12%) and Hong Kong (11%) (RCA, 2009).

In the profile of top 100 commercial property investors in 2007, only commercial

property investors in US and Europe made it in the top 10 with minimum investment

of $8.2 billion, while in Asia, only commercial property investors from 3 Asian

countries; Singapore, Hong Kong and Japan made it in the top 100. From the total of

11% of commercial property investors in Asia, 8% is in the top 50 with a minimum

investment of $3.0 billion. In 2008, the minimum investment for commercial property

investors in the top 10 was reduced to $3.3 billion with commercial property investors

in Asia having the significant participation of 10% in the top 10. Commercial property

65

investors from five Asian countries; Japan, Singapore, Hong Kong, China and South

Korea made it in the top 100 (RCA, 2009).

The Global Financial Crisis has also reduced the property transactions from 2007 to

2008. In the top 10 of 100, Asia (#6: Tokyo hotel; $2.1 billion) accounts for 10% of

the commercial property transactions in 2007 with a minimum investment of $1.6

billion. In the top 100, Asia which consists of property transactions in China (15),

Japan (7), Singapore (7), Hong Kong (2) and South Korea (2) accounts for 33% of the

commercial property transactions with a minimum investment of $585 million.

In 2008, Asia accounts for 30% of the property transactions in the top 10 of 100 with

properties from Hong Kong (#6; office; $1.6 billion), Japan (#7; office; $1.6 billion)

and South Korea (#9; development site; $1.5 billion). In the top 100, Asia which

consists of property transactions in China (9), Japan (8), Singapore (4), Hong Kong

(1) and South Korea (3), India (1), Malaysia (1) and Macau (1) accounts for 28% of

the commercial property transactions with a minimum investment of $256 million.

Compared to other regional property markets, the Asian property market has the

strongest growth prospects, following wider market acceptance and increasing

attention from institutional investors. Importantly, by December 2008, 101 REITs

have been listed in Japan, Singapore, Hong Kong, South Korea, Malaysia, Taiwan

and Thailand. The total market capitalisation of the REIT sector in Asia is

approximately US$48 billion, with more REITs concurrently being created.

Regulatory reform has been made particularly by Singapore and Hong Kong

regulators to enhance their REIT competitiveness in Asia. For a comparison with

other Asian countries, see Table 3.7.

66

Table 3.7: Regulation for Asian REITs in the Region

Japan Singapore Hong Kong South Korea Taiwan Thailand Malaysia

Structure Trust or corporate(listed REITs are allcorporations)

Collectiveinvestmentscheme (Unittrust) orcorporate

Unit trust Corporate-Restructuring,EntrustedManagement,Development-Specialised,Self-Managed

Trust (Real estateasset trust orinvestment trust)

Closed-endmutual fund

Unit trust

Managementstructure

External External Internal/External

Internal/External

Internal/ External External External

% invested inreal estate

For listed J-REIT, atleast 75% of assetsmust be invested inreal estate atall times

At least 70% ofdepositedproperty shouldbe invested inreal estate orrealestate-relatedassets

Only invest inrealestate

At least 70%in real estatesor corporaterestructuringrelatedproperties

Cash, governmentbonds, property,property-relatedrights, beneficiarysecurities or ABSissued underReal EstateSecuritizationAct/ FinancialAsset SecuritizationAct (RESA/FASA)must form at least75% of the NAV

Must invest atleast75% of NAV inproperty

At least 50%of a fund’stotal assetvalue mustbe investedin real estateand/or singlepurposecompanies

Geographicalrestrictions

No restriction underthe Investment Trustand InvestmentCompany Act, but nooverseas acquisitionshave been made asthe requirements onreal estate appraisalof overseaspropertiesare ambiguous.

No No No No restriction underthe RESA; subjectto approval

Thailand only Norestrictionbasically,subject toapprovalfrom SC andrelevantauthorities

Propertydevelopments

Restricted – at least50% of total assetsare incomeproducing andunlikely be soldwithin one year

Propertydevelopmentsandinvestments inuncompletedprojectsshould notexceed 10%

Prohibited, butH-REIT mayacquireuncompletedunitscomprisinglessthan10% NAV

Allow Allow for urbanrenewal,infrastructure orpublic amenitiesconstruction;investments shouldnot exceed 30% ofNAV

May acquireproperties over80% completedbut prohibited toinvest indormant land(for PFPO)

Prohibited,but may enterintoconditionalforwardpurchaseagreement

Leverage No restriction Over 35% oftotalassets permittedwithdisclosed creditrating(capped at 60%)

Capped at 45%ofgross assetvalue

REITs arepermittedto haveexceptionalborrowing up to1000% ofequitycapital, uponspecial approvalofshareholders

Ratings of twAA orabove by two creditrating agencies: 50%;ratings oftwA or above: 35%;those with creditratings: 25%

Not more than10% of NAV

50% of totalasset value(revised from35%)

Dividendpayout

At least 90% toqualifyfor tax deduction

At least 90% At least 90% ofannual netincomeafter tax

At least 90% At least 90% ofdistributable income

At least 90% ofnet profits

Not specifiedin the M-REITguideline

Source: CBRE (2009)

67

The growth of international property investment and the maturity of real estate as an

asset class have seen an increased allocation of real estate by institutional investors. It

is proven that Real Estate Investment Trust delivers a better return compared to other

asset classes over time (RREEF Research, 2007). With the inclusion of Islamic REITs

in the market, REITs are becoming more significant in the pursuit to diversify

investor’s wealth in a portfolio. By 2020, the worldwide Muslim population will rise

to 2.5 billion from the current 1.5 billion. According to the Islamic Funds and

Investment report by Ernst and Young 2007, Shariah factors are important in 60% of

Islamic wealth markets. Islamic banks are expected to manage 40-50% of total

savings of the Muslim population within the next 10 years. Strong economic growth,

rising oil revenues and healthy current account surpluses in many Muslim countries

are among the factors supporting the growing potential of Shariah-compliant

investment. There could be more than US$1 trillion of capital allocated to Shariah-

compliant products. With the fast growing wealth of the Islamic population and

interest in ethical investment, it is essential to produce products to cater for their need.

3.3 Malaysian Commercial Property: Asia Context

By end of 2008, the value of investible commercial property in Asia is $3.7 trillion

(19% of global market), with Japan ($2.0 trillion) having the highest value of

investible commercial property in Asia followed by Hong Kong/China ($640 billion)

South Korea ($384 billion), India ($157 billion), Taiwan ($139 billion), Singapore

($126 billion), Indonesia ($70 billion), Thailand ($52 billion), Malaysia ($50 billion),

Philippines ($23 billlion) and Vietnam ($9 billion). (Newel and Razali, 2009)

Countries with a positive change in percentage from 2007 to 2008 in commercial

property transaction is lead by India (91%) followed by South Korea (86%), Asia

(other) (77%), Malaysia (75%). Asia (other) comprises Macau, Vietnam, Philippines,

Thailand, Indonesia, Kazakhstan, Cambodia and Sri Lanka. Meanwhile, countries

with negative change in percentage from 2007 to 2008 in commercial property

transactions is led by Singapore (-51%) followed by Japan (-15%) and China (-11%).

In total, Asia produced a negative change in commercial property transactions (-12%).

Table 3.8 shows commercial property transactions in Asia in 2007.

68

Table 3.8: Commercial Property Transactions in Asia: 2007

Country Transactionvalue

(US$B)

Percentage ofglobal market

World ranking(by $)

Percentage ofAsia market

China 59.6 5.8 4 40.5

Japan 38.1 3.7 5 25.9

Singapore 18.6 1.8 9 12.7

Hong Kong 14.4 1.4 11 9.8

South Korea 4.9 0.5 18 3.3

Taiwan 4.3 0.4 20 2.9

India 3.2 0.3 25 2.2

Malaysia 2.0 0.2 30 1.4

Asia (Other)* 2.2 0.2 NA 1.5

Total Asia $147B 14.2 100.0

Total Global $1,036B 100.0


The property market in Malaysia continues to be affected by the global financial crisis

together with exports, investment and domestic expenditure during the 4th Quarter

2008. In Kuala Lumpur, the average The average price for luxury apartments in Kuala

Lumpur fell by 4.75% q-o-q in the quarter, with the secondary property market

particularly inactive. The average luxury condominium price in KLCC was RM959

psf, a fall of 8.23% q-o-q and 2.75% y-o-y. In terms of the retail sector, the increase in

unemployment was followed by a decrease in domestic consumption and tourist

expenditure which has forced managers to review high rental rates base on retailers’

request to promote growth. Rental value for retail in Kuala Lumpur city centre by 4th

Quarter 2008 is RM 25 - 85 psf/month (CBRE, 2008). By the end of 2008, total prime

office supply increased by 2.5% to 1.947 million square metres while the vacancy rate

in the Golden Triangle and CBD for office decreased 1.4% to 7.1% q-o-q. Although,

the office sector experienced downward prices with rents decreasing 15%, the average

net rental rate increased by 3.5% year on year to RM528 psm pa with average

investment yield remained 7.25% (JLL, 2009). Table 3.9 shows the property profile of

Malaysia in 2008.

69

Table 3.9: Property Profile of Malaysia: 2008

Investible property: $50 billion; 0.3% global property; 1.4% Asia property

Property market transparency: #23 (globally); #3 (Asia)

Listed property: # property companies = 84

market cap. = US$9B

0.9% of global property companies (#18 globally)

2.1% of global property companies (#6 in Asia)

REITs: # REITs = 13

market cap. = US$1.4B

0.3% of global REITs (#14 globally)

2.5% of Asia REITs (#5 in Asia)

Commercial property transactions:

2008 transactions: $3.5B (Kuala Lumpur: 71%; other 29%)

0.7% of global transactions (#24 globally)

2.7% of Asia transactions (#8 in Asia)

2007-2008 transactions volume change: +75%

Sectors: office (52%), retail (15%), industrial (1%), development sites (23%),

apartments (7%), hotel (2%)

Level of cross-border investment: 49% (versus Asia (27%); global (31%))

Sources: EPRA (2009), JLL (2008), Macquarie Securities (2009), Real Capital Analytics (2009)

70

3.4 Property Ownership Structures

Property ownership structure in Malaysia can be both in direct and indirect property.

The next segments will discuss the profile of listed property companies and REITs in

Malaysia.

3.4.1 Property Companies

By December 2008, the number of listed property companies in Malaysia is 84 with a

market capitalisation of US$9B, which accounts for 0.9% of global property

companies (#18 globally) and 2.1% of Asia property companies (#6 in Asia).

3.4.2 REITs

By December 2008, the number of REITs in Malaysia is 13 with a market

capitalisation of US$1.4B which accounts for 0.3% of global REITs (#14 globally)

and 2.5% of Asia REITs (#5 in Asia). Table 3.10 show the characteristics of

Malaysian REITs.

71

Table 3.10: Characteristics of Malaysian REITs

Management: external manager; 100% foreign ownership allowed

Property investments: at least 75% of total asset value

Overseas investment and tax transparency: yes

Property development: No; can enter into conditional forward purchase agreement

with cover for construction risks)

Gearing: limited to 35% of total asset value

Distribution: no restrictions, but tax-exempt if at least 90% of total income is

distributed; undistributed earnings taxed at 28%

Exemption: Capital gains, stamp duty and corporate tax

Witholding tax: individuals and institutional (10%), foreign corporate (25%)

Valuations: at least every three years

Source: CBRE (2009), EPRA (2008)

Malaysia has pioneered the development of Islamic REITs. With over US$600B in

Islamic finance funds, Malaysia has a significant role in Islamic finance; in particular,

Malaysia is the world's biggest issuer of Islamic debt, ahead of Bahrain, accounting

for US$32 billion or 60 per cent of all Islamic debt globally (Malaysian Islamic

Finance, 2007). Also, 85% of equity stocks traded on Bursa Malaysia are Shariah

compliant. Although Islamic REITs are in the process of being established, Islamic

funds have been well established, with a few of the major Islamic finance and

property funds including Dubai Islamic Bank, Kuwait Finance House and Gulf

Finance House. With an increase on demand for ethical investing, particularly in

Shariah compliant products, Islamic REITs are expected to take on increased

importance with the major international property securities funds, as they seek quality

property exposure in Asia in a Shariah-compliant format (Osmadi, 2007b).

The Al-‘Aqar KPJ REIT, the world’s first Islamic REIT, was listed on the KLSE on

10 August 2006. This has been seen as a good development, as it broadens and

deepens the market for REITs and ethical investing in Asia. It is believed that

unethical investment products contribute negative impacts to the environment.

Moreover, Muslim investors tend to be attracted to enterprises observing Islamic

ethical and moral standards.

72

Islamic investment products are likely to see significant future growth in many

countries. With the introduction of Islamic REITs, it is likely that the Islamic

compliant property market is poised to become significant within the global financial

markets. Today, Islamic financial institutions are advancing and improving their

products to attract more diversified investors, with Islamic REITs expected to play an

important role. The next section will discuss the history of the initial Property Trust

Fund (PTF) in Malaysia.

3.4.3 PTFs

Malaysia is the first Asian country to develop a REIT market. It was better known as

PTFs in 1986. Malaysia used the Australian LPT model to set up the regulatory

framework, although there are some different aspects to the structure. This is mainly

because of the ‘bumiputra’ rules which restrict foreign ownership in favour of

indigenous Malays. The first regulatory framework was approved by Bank Negara

Malaysia (the Central Bank of Malaysia) with the legislation governing their

establishment and operation being the Companies Act 1965 and the Securities

Industry Act 1983 (Rozali and Hamzah, 2006). Later, the Securities Commission (SC)

became the regulator once it was formed. Specific guidelines on PTFs were

introduced by the SC in 1991 and later revised in 1995 and 2002.

Unfortunately, since 1989 until 2004, the regulatory structure was still restrictive.

During these periods, only subsidiary companies of financial institutions were

permitted to set up and manage such funds. In 2004, only 3 PTFs were listed in the

Kuala Lumpur Stock Exchange (KLSE); namely AmFirst Property Trust (AMFPT),

Amanah Harta Tanah PNB (AHP) and Amanah Harta Tanah PNB 2 (AHP2). Other

factors which have contributed to the poor performance of PTFs were the lack of

prime properties and quality assets in their property portfolios. Even with the

availability of these properties, the borrowing limits and the long acquisition periods

have reduced the interest to the parties involved (i.e. investors and property owners).

73

Since its first listing, the price for AMFPT performed better in comparison with other

PTFs. Even during the Asian financial crisis in 1998, the trust was able to sustain,

with the lowest price of 50 sen which is higher than other PTFs in the same period.

The source of this steady income was mainly generated from both of their highly

occupied buildings in Kuala Lumpur, AmBank Group Building and AmBank Group

Leadership Centre.

Meanwhile, difficulties in acquiring prime properties have resulted in the AHP Trust

to expand their property portfolios with non-prime or small properties; e.g. shop

offices, shop houses and secondary buildings. In 1994, the stock market witnessed a

record-breaking bull run with AHP having the highest share price of RM5.75 in 1994.

However, the share price performance has been subdued as a result of the lack of

quality assets, which is then associated with investor’s lack in interest.

These factors have also hindered the performance trust of AHP2. The highest share

price for AHP2 was during its first day of listing, which then appears to fall much

further during the Asian Financial crisis. Until the first half of 2006, the trust

managers were still having difficulties to improve the occupancy level of their

property in Ipoh which is 29.69%. As at August 2006, the share price is the lowest

since it was listed which recorded only 38 sen.

The poor performances of Malaysian PTFs together with the successful development

of REIT-like structures in other countries (e.g. Australia and US) have encouraged the

government and regulators to enhance the existing PTF framework. In the 2005

budget, the Malaysian Government introduced further improvements to its REIT-like

structure which included a more tax transparent structure. However, the tax

transparency in Malaysia is not as attractive as been offered by other countries in the

region. This next section will highlight the development of Malaysian REITs which

include Islamic REITs in Malaysia, and their unique features as investment vehicles.

74

3.4.4 REITs

REITs in Malaysia are listed in the Kuala Lumpur Stock Exchange (KLSE) and are

similar to any other shares that represent ownership in an operating business. REITs

offer two unique characteristics: its primary business objective is to manage income-

producing properties and to distribute most of its profits as dividends. At December

2008, REITs in Malaysia consisted of 11 conventional REITs and 2 Islamic REITs

were listed on the KLSE with the total market capitalisation around RM5136.13

million. This market is expected to continue to expand. These Malaysian REITs cover

the office, retail, industrial and hotel sectors, as well as medical centres and

plantations. Table 3.11 shows the characteristics of the property portfolios of REITs

in Malaysia.

Table 3.11: List of Malaysian REITs by December 2008REITs Bursa Malaysia

ListingProperty Type Market

Capitalisation(RM m)

Conventional REITsAmanah Harta Tanah PNB 28 Dec. 1990 (PTF)

1 Aug. 2005 (REIT)Office andcommercial 77.00

Amanah Harta Tanah PNB 2 25 Mar. 1997 (PTF)1 Aug. 2005 (REIT)

Office51.43

Axis REIT 3 Aug. 2005 Office andindustrial 286.61

Starhill REIT 16 Dec. 2005 Hotel and retail 854.69UOA REIT 30 Dec. 2005 Office and retail 240.15Tower REIT 12 Apr. 2006 Office and

commercial 232.81Hektar REIT 4 Dec. 2006 Retail 244.8AmFirst REIT 21 Dec 2006 Office 336.77Quill Capita Trust 8 Jan. 2007 Commercial 351.12AmanahRaya REIT 26 Feb. 2007 Hotel, office,

factory andshopping centre 353.87

Atrium REIT 2 Apr. 2007 Industrial 74.3

Islamic REITsAl-‘Aqar KPJ REIT 10 Aug. 2006 Hospital 428.72Al-Hadharah Boustead REIT 8 Feb. 2007 Plantation 551.43

Total 4083.7Source: DataStream (31st December 2008) and company reports.

75

3.4.5 Comparison Between PTFs and REITs

In January 2005, the SC issued the new Guidelines on Real Estate Investment Trusts

(REIT Guidelines) to replace the PTF Guidelines issued in 2002. Key changes include

exemption of real property gain tax and stamp duty on properties transferred to

REITs. Table 3.12 shows the comparison between the PTF and REIT guidelines.

Malaysia continued to relax its tax regulations for REITs to attract investors.

According to the Malaysian Budget 2007, if a REIT distributes 90% or more of its

income for a specific year, the REIT will be fully exempt from tax that year. If this

happens, investors will gain higher yields and the REIT management need not pay

tax. Table 3.12 highlights the financial and regulatory differences between the newer

Malaysian REITs and the older style Malaysian property trusts.

Table 3.12: Comparison Between PTFs and REITs

PTF (Old) REIT (New)Management co. (MC) Must be Public Company Private or Public

CompanyForeign ownership inMC

Up to 30% Up to 49%

Leasehold assets Remaining lease periodof at least 60 years

No minimum leaseperiod

Borrowing limit Up to 30% of total assets Up to 50% of totalassets

Encumbered property Must be free fromencumbrances unless withSC’s approval

May include propertyencumbered by financialinstitution

Franked dividend / netrental

Taxable with underlyingcredit available

Taxable with nounderlying. Withholdingtax of 28% for non-residents.

Source: Securities Commission (2008a)

The refined guidelines and the re-branding of PTFs as REITs have led to increased

interest in the Malaysian REIT market, locally and internationally. In addition, the

ownership restrictions that prevent 100% foreign ownership of REIT managers have

been lifted.

76

3.4.6 Comparison Between Conventional REITs and Islamic REITs

The next section will discuss the characteristics of Islamic Finance and thus

comparing it to the conventional system. This will be followed with the comparison

between Conventional REITs and Islamic REITs.

3.4.6.1 Characteristics of Islamic Finance

The demand for Islamic finance has increased in many markets. There are several

reasons behind this recent growth. One is the strong demand from a large number of

immigrant and non-immigrant Muslims for Islamic financial services and

transactions. Second is the growing oil wealth, with demand for suitable investments

soaring in the Gulf region and third is the competitiveness of many of the products,

attracting both Muslim and non-Muslim investors. Today, the number of Islamic

financial institutions worldwide has risen to more than 300 in over 75 countries (see

Table 3.13). They are concentrated in the Middle East and Southeast Asia (with

Bahrain and Malaysia being the biggest hubs), and are also emerging in Europe and

the United States. The rapid growth of the Islamic banking and finance market is

estimated to be worth between US$200 billion to US$500 billion worldwide (UK

Financial Services Authority, 2006).

77

Table 3.13: Major Islamic Financial Institutions

Continents Sample of financial institution by country

Middle-East Bahrain Islamic Bank (Bahrain) Bank Melli Iran (Iran) Jordan Islamic Bank (Jordan) Al-Baraka Bank Lebanon (Lebanon) Qatar Islamic Insurance Company (Qatar) Bank Al-Jazeera (Saudi Arabia) Emirates Islamic Bank (UAE)

South-East Asia Islamic Development Bank of Brunei Berhad(Brunei)

Bank Muamalat Indonesia (Indonesia) Bank Islam Malaysia Berhad (Malaysia) Al-Amanah Islamic Bank (Philippines)

Indian subcontinents Islami Bank Bangladesh Limited (Bangladesh) Al-Barr Finance House Limited (India) Meezan Bank (Pakistan)

Africa Banque Al-Baraka d'Algérie (Algeria) Arab-Gambian Islamic Bank Limited (Gambia) Sudanese Islamic Bank (Sudan) Albaraka Bank (South Africa)

Other countries Albaraka Turkish Finance House (Turkey) Islamic Bank of Britain (UK) American Finance House LARIBA (USA)

Source: http://islamic-finance.net and author’s compilation.

Although Islamic REITs are in the process of being established, Islamic property

funds have been well established and form an important proportion in the growth of

Islamic funds. At least 22 property funds have been created with more than

US$3 billion in capital for investment in Europe, North America, Asia, Africa as well

as in the Middle East. Table 3.14 shows the Islamic finance and Islamic property

investment institutions/funds with Table 3.15 showing some of the leading Islamic

property funds. According to the Islamic Finance News Awards Poll 2008, The Best

Central Bank in promoting Islamic Finance is Bank Negara Malaysia while The Best

Islamic Bank is Kuwait Finance House, followed by Malaysia’s CIMB Islamic Bank.

78

Table 3.14: Islamic Finance and Islamic Property Investment Institutions/Funds

Islamic banksQatar Islamic BankDubai Islamic BankBahrain Islamic BankBank Al-Jazeera (Saudi Arabia)Emirates Islamic Bank (UAE)Bank Islam MalaysiaBank Muamalat IndonesiaAl-Amanah Islamic Bank (Philippines)Islamic Bank of BritainAmerican Finance House LARIBA (USA)

Shariah-compliant real estate playerCrescent Capital/First IslamicKuwait Finance HouseGulf Finance HouseQatar Islamic BankDubai Islamic BankNational Commercial Bank (Saudi Arabia)Bank Islam Malaysia

Islamic real estate fundsGulf Atlanta France: $700MBaitah Asia Real Estate Fund: $600MIslamic European Real Estate Fund: $490MAl Islamic For Eastern Real Estate Fund: $450MAl Islamic French Property Fund: $215MNaila Euro Commercial Properties: $208MGlobal Properties Income Fund: $200MGuidance Fixed Income Fund: $200MChina Realty Fund: $150MAl Bait UK Real Estate Fund: $100MSources: Ibrahim and Ong (2008), Osmadi (2006), Ernst & Young (2006), RICS (2006)

79

Table 3.15: Major Islamic Property Funds

Fund Sponsor CapitalizationUS $

Place ofOrigin

Year ofInception

InvestmentMarket

Gulf AtlanticFrance

Gulf Finance House 694 million Bahrain 2003 France

Al Islami FarEastern RealEstate Fund

Dubai IslamicBank/Cheung KongGroup

450 million UAE/HongKong

2004 SoutheastAsia

Al IslamiFrenchpropertyFund

Dubai Islamic Bank 215 million UAE 2004 France

Noriba EuroCommercialProperties

Noriba Bank 208 million Bahrain 2004 EU

GlobalPropertiesIncome Fund

HSBC Amanah 200 million Dubai 2002 U.S.

AlBait UKReal EstateFund

ABC Islamic AssetManagement

100 million UK 2003 UK

Source: Ernst & Young (2006)

Islamic finance differs to the conventional financial system (see Table 3.16), as it is

subject to the Islamic law principle. Among Muslim investors, this is known as the

Shariah principle. For example, Islamic banking operates in accordance with the

Islamic rules on transactions. The Islamic financial system is viewed to be

advantageous to both sides of the capital provider and client as to embrace the concept

of value-adding partnership, and profit and risk sharing. The key difference of the

Islamic financing system is they do not charge and pay interest. Returns cannot be

fixed in advance, but must be a proportion of profits derived from their partnership

venture. The bank makes business investments in the hope of making a profit. Since

this profit represents real worth and involves a shared risk, it is regarded as acceptable

by Islamic scholars. The profits are shared, based on a profit sharing ratio.

80

Table 3.16: Comparison Between Islamic and Conventional Financial Systems

Items Islamic Conventional

Issuance process Must be approved byShariah scholars andSecurities Commission

Must be approved bySecurities Commissiononly

Issuers Government, semi-Government and privatesectors

Government, semi-Government and privatesectors

Investors Both conventional andIslamic investors

Only conventionalinvestors

Nominal value guaranteeof:Demand depositsInvestment deposits

YesNo

YesYes

Equity based systemwhere capital is at risk

Yes No

Rate of return on deposits Uncertain, notguaranteed

Certain and Guaranteed

Mechanism to regulatefinal returns on deposits

Depending on banksperformance/profitsfrom investment

Irrespective of banksperformance/profits frominvestment

Profit and Loss Sharing(PLS) principle is applied

Yes No

Use of Islamic modes offinancing PLS and non-PLS modes

Yes N/A

Use of discretion by bankswith regard to collateral

Possible for readingmoral hazard in PLSmodes.Yes in non-PLS modes

Yes always

Banks ‘pooling ofdepositors’ funds toprovide depositors withprofessional investmentmanagement

Yes No

Source: Errico and Farahbaksh, (1998) and author’s compilation

It is a requirement that every Islamic financial institution that offers Islamic products

and services establish a Shariah advisory committee/consultants to advise them and to

ensure that the operations and activities comply with Shariah principles. All such

Islamic structures will be certified by the Shariah Board, which comprises a panel of

81

experts who are drawn from respected Shariah scholars with the expertise in Islamic

law.

Generally, Islamic law prohibits engaging with haram (religiously non-permissible)

activities which involves either products or services, but allows halal (religiously

permissible) activities. For various reasons, an activity is labelled haram as it is

considered to be harmful and destructive. Among the haram activities are:

1) Economic activities involving oppression, speculation and gambling.

2) Manufacturing and production of goods and services which is

against Islamic values.

3) Interest base transactions.

The following are some Islamic finance terms: (RICS, 2006)

Riba

Under the Shariah concept, riba or usury refers to the extra payment that must be paid

without any consideration that is acceptable under Islamic jurisdictions. It is

considered exploitive where one may earn without working in the expense of others.

In this context, riba comes in the form of interest, unlawful gain or unjustified

rewards. Muslim jurists have classified riba into two types:

Riba Al-Fadl

This term refers to unjust exchange in business transactions. Example of riba al-fadl:

Example 1: A sells $100 with a value of $110 to B without Shariah base

consideration. The extra payment of $10 will be riba and unacceptable.

Riba Al-Nasi’ah

This term refers to the charging of interest on loans from the lender in return for his

waiting period. Examples of riba al-nasi’ah:

82

Example 1: A lends $100 to B, with a condition that B shall return to him $110 after

one month without Shariah base consideration. The extra payment of $10 will be riba

and unacceptable.

Example 2: A lends $100 to B, with a condition that B shall return to him the

principal amount of $100 with additional payments based on variable interest rates per

annum until the loan is fully paid. The extra payments will be riba and unacceptable.

Initially, Islamic law does not allow the use of interest. Even though a borrower from

an Islamic bank is protected against the increase of interest rates, they will not benefit

from interest rate drops offered by conventional banks. Nevertheless, with

unpredictable market conditions, it is unlikely that a customer will profit more dealing

with conventional banks as Islamic banks ensure safer banking for the future.

On the other hand, Islamic finance does not deny market forces, profit motives and

private ownership of wealth, as long as it is acceptable within the limits of Islamic

jurisprudence. In order to expand credit fairly, but remain a profitable institution,

Islamic law uses different methods of financing. There are a range of Islamic financial

methods that offer the same financial needs as conventional banks (see Table 3.17).

Table 3.17: Financial Needs with Islamic Contracts Applied

Key FinancialNeeds

Islamic ContractsApplied

Sample BankOffering

Trade FinancingLetter of Credit Murabaha Credit Bahrain Islamic BankFinancing Working Capital Murabaha Bank Islam

Corporate FinancingAsset Financing(Raw Material, Equipment)

Murabaha Financing Bank Muamalat

Construction /Project Financing

Istisna Kuwait Finance House

Leasing Equipment/ HeavyMachinery

Ijarah Muslim Commercial Bank

Joint Ventures/ BusinessPartnerships

MusharakahMudarabah

Dubai Islamic Bank

Source: Dinarstandard.com

83

Below are the descriptions of common Islamic concepts used in finance:

Debt instruments

Murabaha (cost-plus profit): a contract of sales between the capital provider and its

client. The capital provider purchases the client’s desired goods from a third party.

Then, the capital provider sells it to the client at an agreed mark-up price. With this,

the client has effectively obtained credit without paying interest. Repayment is usually

in instalments. Such a contract is valid on the condition that the price, other costs and

the profit margin of the seller are stated at the time of the agreement on the sale.

Istisna (manufacturing): a contract of sales and purchase of assets by specification or

order where the price is paid in advance, but the assets are manufactured or produced

and delivered at a later date.

Qard al-Hasan (benevolent loan): an interest-free loan for either welfare purposes or

for fulfilling short-term funding requirements. The borrower is only required to pay

back the amount borrowed.

Quasi-debt instruments

Ijara (leasing): a leasing contract whereby the capital provider purchases a piece of

equipment selected by the client and then leases it back to him for a specified rent and

term. Instead of lending money and earning interest, ijara allows the capital provider

to earn profits by charging rentals on the asset leased to the client.

Ijara wa iqtina (hire and purchase): a hire and purchase agreement. The transaction

resembles ijara, except that the client is committed to purchase the equipment at the

end of the rental period.

Sukuk (Islamic bond): similar characteristics to that of a conventional bond with the

difference being that they are asset backed; a sukuk representing proportionate

beneficial ownership in the underlying asset. The asset will be leased to the client to

yield the return on the investment.

84

Profit-and-loss-sharing instruments

Musharaka (joint venture): an equity participation contract under which the capital

provider and its client contribute jointly to finance a project. All parties share profits

on a pre-agreed ratio while losses are shared according to each party’s equity

participation. The reason is because in Islam, one cannot loose what they did not

contribute. Management of the venture is carried out by all, some, or just one party

member.

Mudaraba (investment partnership): a contract of investment partnership between the

capital provider for the project and the entrepreneur who will manage the project to

pursue partnership goal. The profit is shared according to the pre-agreed ratios. Aside

from the case of misconduct or violation of the conditions agreed upon by the capital

provider, any losses accruing are borne by the capital provider while the entrepreneur

loses its time, effort and share of the expected income. This arrangement reflects the

Islamic view that all those who participate in the same contract should bear the risk of

failure.

According to a survey conducted by RICS, the most preferred Islamic method of

financing is ijarah, followed by murabahah, sukuk, musharakah and mudarabah

respectively.

3.4.6.2 Characteristics of Islamic REITs

At present, Malaysia is the Islamic financial hub for the South Asian region.

According to credit-ratings agency Moody's Investors Service, Malaysia's Islamic

bond market is the largest in the world, accounting to US$30 billion of the US$41

billion in Islamic bonds issued since 1996. The Islamic finance system in Malaysia

has been long established since 1983 and is widely acceptable by Muslims and non-

Muslims locally and internationally. It has gained investor confidence for a promising

investment return. With increasing awareness and growth of oil wealth, particularly in

terms of attracting significant capital flows from other Islamic countries (eg: Middle

East), there has been a strong demand for more innovative and competitive products

from the Islamic financial industry.

85

Revised financial property regulations have recently improved the Malaysian REIT

environment. These include the implementation of a tax transparent structure and the

exemption from real property gains tax and stamp duty on properties that form a

REIT. Malaysia was the first Asian country to develop property trust funds (PTF) in

1986 and later REITs in 2005. Malaysia has introduced the Islamic REIT guidelines

in 2005, the first in the world to diversify their investment products.

An Islamic REIT is a form of ethical investment which is subject to the Shariah

principle. It differs to the conventional REIT system, as its framework is subject to the

Islamic law principle. Among Muslim investors, this is known as the Shariah

principle. The Islamic law principle prohibits engaging with haram (religiously non-

permissible) activities which involve either products or services, but allows halal

(religiously permissible) activities. For various reasons, an activity is labelled haram

as it is considered to be harmful and destructive.

In November 2005, the Syariah Advisory Council (SAC) of the Securities

Commission (SC) published the guidelines for Islamic REITs in Malaysia. The

Syariah Advisory Council (SAC) operates as the Shariah board in Malaysia. It is a

requirement that every Islamic financial institution that offers Islamic products and

services establish a Shariah advisory committee/consultants to advise them and to

ensure that the operations and activities comply with Shariah principles. All such

Islamic structures will be certified by the Shariah Board, which comprises a panel of

experts who are drawn from respected Shariah scholars with the expertise in Islamic

law. In the Malaysian Islamic REIT context, every single property transaction will

have to be scrutinized by the SAC to ensure full compliance with Islamic principles.

Therefore, all properties and tenants and subleasing details have to be screened and

approved by the SAC. The development of Islamic REIT guidelines compliments the

SC’s guidelines on REITs in Malaysia that were issued on January 2005. According

to these guidelines, if an Islamic REIT would be introduced, it should be structured to

comply with the conventional and Islamic REIT guidelines.

According to the guidelines, an Islamic REIT is permitted to own or purchase

property in which the tenants operate mixed activities that are halal and haram, but

86

with restrictions. In a situation where the property has tenants operating haram

activities, the fund manager needs to perform some additional compliance

assessments before acquiring the property for an Islamic REIT. They need to ensure

that the total rental ratio from haram activities to the total turnover of the Islamic

REIT in the current financial year should not exceed 20 percent. Rental activities that

are classified as haram as decided by the SAC are:

Manufacturing or sale of haram products (i.e pork products, tobacco, alcoholic

liquor, arms and ammunitions).

Entertainment activities- cinema, pornography and any other obscene

materials, hotels and resorts.

Gambling.

Conventional insurance companies.

Stockbroking or share trading in non-Shariah compliant securities.

Banks and Financial Institutions with riba (interest) base services.

If it does exceed 20 percent, the SAC will advise against investing in such a property.

The fund manager needs to be well-versed in differentiating halal and haram

activities. In addition, the manager of an Islamic REIT has to ensure that all forms of

investment, deposit and financing instruments comply with the Shariah principles.

Besides that, it has to use Islamic insurance to insure its property. However,

conventional insurance is acceptable if Islamic insurance is unavailable. An Islamic

REIT is also not permitted to own a property in which all the tenants operate only

haram activities. It cannot be put into an Islamic REIT, even if the total rental

complies with the 20% benchmark. In the case of accepting new tenants, tenants who

operate fully haram activities will not be allowed. Table 3.18 shows the comparison

between Islamic and Conventional REITs.

87

Table 3.18: Comparison Between Islamic and Conventional REITs

Items Islamic ConventionalIssuance process Must be approved by

Shariah scholars andSecurities Commission

Must be approved bySecurities Commissiononly

Investors Both conventional andIslamic investors

Only conventionalinvestors

Property tenants Tenants operating onlyharam activities willnot be permitted.Restrictions applieswhen tenants operatesmixed activities.

Tenants operating anyactivities

Source: Securities Commission, Malaysia.

In August 2006, the first Islamic REIT was successfully listed, being the latest

product which complements the existing mature industry of conventional REITs; the

first such product in the world. The Islamic REIT will allow foreign investors

especially from the Middle East to invest in Malaysia’s property market without being

associated with the direct ownership of the company. The first Islamic REIT, Al-

‘Aqar KPJ REIT, comprises 6 properties in the hospital sector with a total asset value

of US$92 million; namely Ampang Puteri Specialist Hospital Building, Damansara

Specialist Hospital Building, Johor Specialist Hospital Building, Ipoh Specialist

Hospital Building, Puteri Specialist Hospital Building and Selangor Medical Centre

Building. The Al-Aqar KPJ REIT, launched by KPJ Healthcare, has a total asset value

of US$131 million.

Malaysia was the first country to establish Islamic REITs. Malaysia currently has two

Islamic REITs, Al-‘Aqar KPJ REIT (consists of hospital properties) and Al-Hadharah

Boustead REIT (consists of plantation related properties). With a total market

capitalisation of over RM950 million; representing 19% of the Malaysian REIT

sector. Every single property transaction for an Islamic REIT has to be examined by

the Shariah Advisory Council (SAC) of the Malaysian Securities Commission to

ensure full compliance with Islamic principles. The Islamic REIT guideline, which

complements the existing Malaysian REIT guidelines, allows investors to enjoy the

benefits of conventional REITs while being Shariah-compliant.

88

The manager of an Islamic REIT needs to ensure that all forms of investment, deposit

and financing instruments comply with the Shariah principles. In addition, an Islamic

REIT has to use Islamic insurance to insure its property. However, conventional

insurance is acceptable if Islamic insurance is unavailable. An Islamic REIT is also

encouraged to participate in forward sales or purchases of currency with Islamic

financial institutions. However, if the Islamic REIT deals with conventional financial

institutions, it is permitted to participate in the conventional forward sales or

purchases of currency (Securities Commission, 2005b).

The Islamic financial system is viewed to be advantageous to both sides of the capital

provider and client as to embrace the concept of a value-adding partnership, and profit

and risk sharing. A few of the general Islamic finance laws that need to be followed

includes the debt and cash money should not form more than 50% of the existing

assets, and the debt to equity ratio of the company should not be more than 30:70%.

By following the Malaysian guidelines for Islamic REITs, it is seem to be

advantageous, as it encourages production of lawful commodities and services and

thus promotes ethical business and ethical investing. The only difference between the

conventional REITs and Islamic REITs is that Islamic REITs need to follow the

Shariah guidelines (Osmadi, 2006). Appendix I will discuss the establishment of 11

conventional M-REITs and 2 Islamic M-REITs in Malaysia.

3.5 Market Size – Liquidity Issues

The REIT market size is still small in Malaysia in comparison to their counterparts.

Transparency is still a big issue. This will be discussed in Chapter 7.

89

3.6. Future Opportunities

Islamic financial services have reached $729 billion at end-2007, 37% up from $531

billion in 2006 (IFSL, 2007). Meanwhile, the Islamic banking industry is valued at

several hundred billion dollars. According to McKinsey (2006), the Islamic Banking

Sector is worth between US$180 billion and US$250 billion while according to

estimates from Dubai International Financial Centre (DIFC), the global market of

Islamic financial products is worth more than US$200 billion and consists of 300

financial institutions in and outside the Muslim world. Shariah compliant products

(include banking assets and asset management) were valued at around US$450 billion

(ex-Iran) in 2006. With growth of 23.5% p.a. over the past five years, Shariah

compliant products are expected to grow at 17% p.a. to exceed US$1 trillion in value

by 2010 (ex-Iran) (McKinsey, 2006). The sector outside Iran has reached $US400-

500 billion and is on track to exceed US1 trillion by 2010.

There are a growing number of infrastructure projects requiring Islamic-compliant

finance, and this has created a considerable demand for professional services and

products within the Middle East region. However, Shariah-compliant real estate and

infrastructure investment are still relatively under-developed and fragmented.

According to Ernst and Young, US$8.6 billion was raised in the region for real estate

investment, demonstrating the strong appetite for real estate investment. For example,

Saudi Arabia’s General Organization for Social Insurance pension fund allocation has

planned to increase its real estate allocation to 1% to 5% over the next five years.

Moreover, of the US$3.7 billion invested by Middle East and North Africa private

equity firms in 2006, the largest share went to real estate (40%), followed by financial

services (17%) and travel and services (15%).

90

CHAPTER 4

METHODOLOGY

4.1 M-REIT Index Development

A PTF, overall M-REIT, conventional M-REIT and Islamic M-REIT index will be

developed to assist further empirical analyses in this thesis. In this context, the

construction of the Property Trust Fund index is significant to show the historical

performance of previous listed property trusts in Malaysia. The PTF index will start

from December 1989 until July 2005. For the purpose of this thesis, the PTF index

will end at July 2005 before the inception/rebranding of PTFs to M-REITs in August

2005. Meanwhile, the overall M-REIT and conventional M-REIT indices will start

from August 2005 until the end of December 2008, whilst the Islamic M-REIT index

will start from August 2006 until the end of December 2008. This covers the period

since the full introduction of both M-REITs and Islamic M-REITs. All total return

indices are constructed on a weekly basis to ensure sufficient data points over this

time period in constructing these M-REIT indices, with the market capitalisation-

weighted scheme applied due to the consistency with the other existing KLSE indices.

As such, the M-REIT indices will be benchmarked against the overall Malaysian

stock market performance indicators, including the Kuala Lumpur Composite Index

(KLCI). All indices have been rebased at base date = 100. The index is constructed

using the following equation:

MnRn + 1 base value t-1

Mn

where Mn represents the market capitalisation for M-REIT, Rn is the total return for

M-REIT, n is number of M-REIT available and t is the corresponding week and the

91

first base value is set at 100. The developments of these M-REIT indices are

important as investment performance indices have specific applications for a range of

interest groups (see Table 4.1).

Table 4.1: Investment Performance Index Applications

Applications PropertyOwners &Managers

PortfolioManagers

Investment &FinanceAdvisers

Asset allocation

Performance of property versusother asset classes

Measure property risk andreturn

Individual propertyperformance comparisons

Identify the best performingproperty sub-markets

Property cycle monitoring

Attribution analysis

Monitoring trends in income andexpense

Monitoring of valuationassumptions

International comparison of propertyperformance

Source: PCA (2005)

In constructing the M-REIT indices, two timeline indices will be constructed. The

first timeline will consist of the overall M-REITs, while the second timeline will

consist of only conventional REITs which exclude Islamic REITs, and Islamic REITs.

To derive both indices, the timeline will be based on accumulative market value,

92

based on the timing on the inclusion of each of the M-REITs. The components of the

four indices constructed are shown in Table 4.2, as well as the timing of their

introduction in the various indices constructed as seen in Figures 4.1, 4.2, 4.3 and 4.4.

Figure 4.2 and 4.4 tracks the market capitalisation.

Table 4.2: Components of PTF and Various M-REIT Indices

PTF Index Overall M-REIT IndexFirst Malaysia Property Trust Amanah Harta Tanah PNBAmFirst Property Trust Amanah Harta Tanah PNB 2Amanah Harta Tanah PNB Axis-REITAmanah Harta Tanah PNB 2 Starhill REIT

UOA REITTower REITAl-Aqar KPJ REITHektar REITAmfirst REITQuill Capita TrustAl-Hadharah Boustead REITAmanaraya REITAtrium REIT

Conventional M-REIT Index Islamic M-REIT IndexAmanah Harta Tanah PNB Al-Aqar KPJ REITAmanah Harta Tanah PNB 2 Al-Hadharah Boustead REITAxis-REITStarhill REITUOA REITTower REITHektar REITAmfirst REITQuill Capita TrustAmanaraya REITAtrium REIT

93

Figure 4.1: Property Trust Fund Timeline

0

200

400

600

800

1000

1200

1400

01-Nov-8

9

01-Sep

-90

01-Jul-9

1

01-May

-92

01-Mar-

93

01-Jan-9

4

01-Nov-9

4

01-Sep

-95

01-Jul-9

6

01-May

-97

01-Mar-

98

01-Jan-9

9

01-Nov-9

9

01-Sep

-00

01-Jul-0

1

01-May

-02

01-Mar-

03

01-Jan-0

4

01-Nov-0

4

01-Sep

-05

01-Jul-0

6

mkt. cap.

FMPT

(Nov. 89)

AMFPT

(Jan. 90)

AHP

(Dec. 90)

AHP2

(Mar. 97)

FMPT

-delisted-

(Aug. 02)

AHP, AHP2

-change to REIT-

(Aug. 05)

AMFPT

-delisted-

(Jan. 07)

Source: Author’s compilation from DataStream and annual reports.

Figure 4.2: Overall M-REIT Timeline

0

1000

2000

3000

4000

5000

6000

01-Aug

-05

01-Oct-

05

01-Dec

-05

01-Feb

-06

01-Apr

-06

01-Ju

n-06

01-Aug

-06

01-Oct-

06

01-Dec

-06

01-Feb

-07

01-Apr

-07

01-Ju

n-07

01-Aug

-07

01-Oct-

07

01-Dec

-07

01-Feb

-08

01-Apr

-08

01-Ju

n-08

01-Aug

-08

01-Oct-

08

01-Dec

-08

mkt cap.

AHP, AHP2, Axis

(Aug. 05)

Starhill, UOA

(Dec. 05)

Tower

(Apr. 06)

Al-Aqar

(Aug. 06)

Hektar, AmFirst

(Dec. 06)

QCapita

(Jan. 07)

Boustead, AmanahRaya

(Feb. 07)

Atrium

(Apr. 07)


94

Figure 4.3: Conventional M-REIT Timeline

0

500

1000

1500

2000

2500

3000

3500

4000

4500

01-Aug

-05

01-Oct-

05

01-Dec

-05

01-Feb

-06

01-Apr

-06

01-Ju

n-06

01-Aug

-06

01-Oct-

06

01-Dec

-06

01-Feb

-07

01-Apr

-07

01-Ju

n-07

01-Aug

-07

01-Oct-

07

01-Dec

-07

01-Feb

-08

01-Apr

-08

01-Ju

n-08

01-Aug

-08

01-Oct-

08

01-Dec

-08

mkt cap.

AHP, AHP2, Axis

(Aug. 05)

Starhill, UOA

(Dec. 05)

Tower

(Apr. 06)Hektar, AmFirst

(Dec. 06)

QCapita

(Jan. 07)

AmanahRaya

(Feb. 07)

Atrium

(Apr. 07)


Figure 4.4: Islamic M-REIT Timeline

0

200

400

600

800

1000

1200

14-Aug

-06

14-Oct-

06

14-Dec

-06

14-Feb

-07

14-Apr

-07

14-Ju

n-07

14-Aug

-07

14-Oct-

07

14-Dec

-07

14-Feb

-08

14-Apr

-08

14-Ju

n-08

14-Aug

-08

14-Oct-

08

14-Dec

-08

mkt. cap.

Al-Aqar

(Aug. 06)

Boustead

(Feb. 07)


95

Axis REIT has reclassified itself to an Islamic REIT at December 2008, but for this

research, it will be treated as a conventional M-REIT as the final period for the

performance analysis was December 2008.

4.2 M-REIT Performance Analysis and Other Asset Classes

Performance analyses will be carried out for each M-REIT index starting from August

2005 until the end of December 2008 respectively. Since REITs were only recently

listed in the Kuala Lumpur Stock Exchange in August 2005 and followed by Islamic

M-REITs in August 2006, this specific performance analysis for REITs in Malaysia

will be over a short timeframe. The lack of a longer timeframe sees the standard

performance analysis procedures of risk-adjusted returns and inter-asset correlations

unable to be implemented over the longer time periods typically seen for more

established REIT markets (eg: US, Australia). In this case, the analyses are done over

the maximum timeframe available to December 2008.

It was necessary to construct a market capitalisation weighted total return series for

the performance analyses. Data on the weekly market capitalization and total return

index for M-REITs, Kuala Lumpur Composite Index (KLCI) and the sub-indices

(property, finance and plantation) are obtained from DataStream. The KLCI is used as

a benchmark for the performance of the Kuala Lumpur Stock Exchange. For

comparison purposes, the KLSE sub-indices (property, finance, and plantation) are

included. Direct property is not included, as there is lack of an institutional standard

Malaysian direct property series and only quarterly data of Kuala Lumpur direct

property are available from JLL. The beginning period of August 2005 is chosen as

the time of the first M-REIT listed on the KLSE. For the risk-free rate, the 10-year

government bond yield will be used. As M-REITs are generally rated as long-term

investments, the 10-year bond rate is considered appropriate. Most analysts use the

10-year bond as the risk-free benchmark in Malaysia.

The annual performance of M-REIT returns and risk (standard deviation) was

assessed from the calculated weekly market capitalisation weighted total return series.

96

Performance analysis will also be carried out for Malaysian Property Trust Funds

(PTFs) starting from 1989 to demonstrate the underperformance and lack of investor

support for PTFs in Malaysia; giving a stronger context for the development of M-

REITs. The overall and M-REIT performance period will start from 12 August 2005

to 31 December 2008, while the Islamic M-REIT performance is analysed due to its

later listing from 18 August 2006 to 31 December 2008. To assess the effect of the

global financial crisis, the M-REIT performance analysis period will be divided into 2

sub-periods. Pre-global financial crisis analysis starts from 8 August 2005 – 27

August 2007 for the overall M-REIT series and starts from 21 August 2006 – 27

August 2007 for the Islamic M-REIT series. The post-global financial crisis analysis

starts from 3 September 2007 – 29 December 2008 for both the overall M-REIT and

Islamic M-REIT analysis.

To analyse the portfolio diversification benefits of M-REITs, the inter-asset

correlation matrix is used. In determining portfolio diversification benefits,

correlations which are close to one show a lack of diversification benefits. Correlation

coefficients which are closer to zero or slightly negative will have a diversification

effect.

Several risk-adjusted return measures are used. To calculate the reward-to-risk ratio

for each asset, the formula is indicated below:

Reward-to-risk ratio= Return / Risk

The Sharpe ratio is also calculated as a measure of risk-adjusted performance. For the

same time period, the average Malaysian Government Securities (MBS) Index Series

from www.quantshop.com is being used as the risk-free investment rate to determine

the best obtainable rate of return. The formula is as indicated:

Sharpe ratio = ( Rx - Rf ) / StdDev(x)

97

where:

Rx is the average annual rate of return of asset x

Rf is the best obtainable rate of return of a "risk-free" security (i.e. 10-year

bond)

StdDev(x) is the standard deviation of Rx

To calculate the various mixed-asset portfolios, the general formula for expected

return and standard deviation is indicated below:

Expected Return = 1

( )n

P i ii

E r w E r

where:

1

n

ii

w = 1.0;

n = the sample size;

iw = the weight of the funds invested in security i;

,i Pr r = the return on ith security and portfolio p; and

E = the expectation of the variable in the bracket.

Standard Deviation =1

)( 2

n

xxi

where:

n = the sample size;

xi = represents each data value from i=1 to i=N

x = the sample mean

In addition to the previous analysis, a panel regression on M-REITs performance

using firm’s characteristics (such as debt, ROA) as dependent variables will be use.

Panel regressions would be able to partially overcome the limited data faced in this

study to check the robustness of the findings.

98

4.3 M-REIT Surveys

A survey of the factors affecting the development of Malaysian REITs was also

conducted. Three similar questionnaires have been developed and personal interviews

conducted for three distinct groups of participants; REIT managers, fund managers

and property advisors. A copy of each survey and covering letter is given in Appendix

I, II and III. The common questions in the questionnaire included:

31 specific factors on the ongoing success of Malaysian REITs

31 specific factors on the current performance of Malaysian REITs

Qualitative questions regarding Malaysian REITs.

This survey approach was considered beneficial to obtain more insight into the views

and decision-making processes for these three groups concerning M-REITs and

Islamic M-REITs. Participants were asked to assess how important each factor was to

the development of REITs in Malaysia. All questions were scored on a 5-point rating

scale, ranging from 1 = not available to 5 = essential. Results are presented overall

and for each of these three groups of survey participants.

This survey was distributed over October - December 2007 to senior participants in

the Malaysian property industry. Contact information was obtained from published

resources (i.e. fund’s website, prospectus and/or annual report), with the PhD

candidate returning to Malaysia to conduct these personal interviews. Opinions from

these three distinct participants are very important and will benefit the future

development of Malaysian REITs. The outcomes from this survey will only be

presented at the aggregate level to ensure the confidentiality of the survey

respondents.

As this survey was focused on the impact of factors towards property investment, this

survey will not consider other groups such as property developers. Overall, 150

questionnaires were distributed and a total of 96 questionnaires were returned which

represents REIT managers (11), fund managers (55) and property advisors (30). A

personal interview of approximately 20 minutes was also conducted to obtain more

99

information regarding Malaysian REITs. Three different approaches were used: in

person, by phone and by email to maximize respondent participants. The overall

survey response rate was 64%, and the response rates within each group were

relatively high; REIT managers (85%), fund managers (65%) and property advisors

(58%). The quality of respondents was excellent, with all respondents consisting of

staff in senior positions; further reflecting the quality of this M-REIT survey

information.

Spearman rank correlation analysis is used to calculate the rank correlation coefficient

to assess the overall association of these three sub-groups regarding their responses.

The formula is as indicated below:

where:

di = xi − yi = sum of the squared difference between the ranks of corresponding

values Xi and Yi,

n = the number of values in each data set.

One-way ANOVA analysis will also be used to examine the significant differences in

responses between these 3 groups, with the Least Significant Difference procedure

used to identify specific statistical differences. Factor analysis was also used to assess

the underlying “property investment” dimensions of the 31 factors regarding the

ongoing success of Malaysian REITs and the 31 factors on the current performance of

Malaysian REITs. Varimax rotation will be used in this factor analysis as a method of

extraction to undertake the analysis. This was done at the overall level and for the

three sub-groups in the survey. Results are obtained using SPSS. Selection of the

significant factor analysis weights will be based on weights between 0.5-0.9.

100

CHAPTER 5

MALAYSIAN REIT PERFORMANCE ANALYSIS

5.1 Introduction

The purpose of this chapter is to examine the overall M-REIT performance analysis,

which includes risk-adjusted returns and portfolio diversification benefits for overall

and conventional M-REIT analysis from August 2005 to December 2008 and for

Islamic M-REIT analysis from August 2006 to December 2008. The significance of

M-REITs and Islamic M-REITs in a mixed-asset portfolio will also be discussed. To

assess the potential changing investment dynamics of the M-REIT sector, the full

period of 8 August 2005 – 29 December 2008 was broken into the two sub-periods of

8 August 2005 – 27 August 2007 and 3 September 2007 – 29 December 2008, while

for the potential changing investment dynamics of Islamic M-REIT sector, the full

period of 21 August 2006 – 29 December 2008 was broken into the two sub-periods

of 21 August 2006 – 27 August 2007 and 3 September 2007 – 29 December 2008.

This is particularly to assess whether these portfolio benefits have been enhanced in

more recent years as the Asian property markets have improved their levels of

maturity and to assess the impact of the global financial crisis on M-REITs (JLL,

2008).

Four new property indices, namely the PTF Index (1989-2005), M-REIT Index

(August 2005-December 2008), Conventional M-REIT Index (August 2005-

December 2008) and Islamic M-REIT Index (August 2006-December 2008) have

been developed for this M-REIT performance analysis section. M-REITs are added

subsequently from 8 August 2005 and 29 December 2008 as they were listed. With

the addition of more M-REITs, the market capitalisation of the M-REIT sector has

increased from RM117.91 million (US$34.03 million) in August 2005 to RM3948.54

101

million (US$1139.68 million) by end of December 2008 (see Figure 5.1). As depicted

in Figure 5.1, for the period between 21 August 2006 and 29 December 2008, only

two Islamic M-REITs shown in bold are included in the M-REIT weekly timeline

index; namely Al-Aqar KPJ REIT (hospital properties) and Al-Hadharah Boustead

REIT (plantation properties). The market capitalisation for the Islamic REIT sector

has increased from 15% out of the overall market capitalisation for M-REITs in

August 2006 to 21% by the end of December 2008 (see Figure 5.2).

The following sections use the various PTF and M-REIT series developed in this

thesis to highlight the risk-adjusted performance and portfolio diversification benefits

on these various PTF and M-REIT series; particularly highlighting the contribution of

Islamic M-REITs.

Figure 5.1: Growth in Market Capitalisation of Overall M-REIT Index and

Conventional M-REIT Index Market

0

1000

2000

3000

4000

5000

6000

01-Aug

-05

01-Oct-

05

01-Dec

-05

01-Feb

-06

01-Apr

-06

01-Ju

n-06

01-Aug

-06

01-Oct-

06

01-Dec

-06

01-Feb

-07

01-Apr

-07

01-Ju

n-07

01-Aug

-07

01-Oct-

07

01-Dec

-07

01-Feb

-08

01-Apr

-08

01-Ju

n-08

01-Aug

-08

01-Oct-

08

01-Dec

-08

mkt. cap.

(RM m)

Overall M-REIT Conventional M-REIT

AHP, AHP2, Axis

(Aug. 05)

Starhill, UOA

(Dec. 05)

Tower

(Apr. 06)

Al-Aqar

(Aug. 06)

Hektar, AmFirst

(Dec. 06)

QCapita

(Jan. 07)

Boustead, AmanahRaya

(Feb. 07)

Atrium

(Apr. 07)


102

Figure 5.2: Growth in Market Capitalisation of Islamic M-REIT Index

0

5

10

15

20

25

14-A

ug-0

6

14-O

ct-0

6

14-D

ec-0

6

14-Feb

-07

14-A

pr-0

7

14-Ju

n-07

14-A

ug-0

7

14-O

ct-0

7

14-D

ec-0

7

14-Feb

-08

14-A

pr-0

8

14-Ju

n-08

14-A

ug-0

8

14-O

ct-0

8

14-D

ec-0

8

(%) of Islamic

M-REIT Index

mkt. cap.

Al-Aqar

(Aug. 06)

Boustead

(Feb. 07)


5.2 Property Trust Fund Analysis (1989-2005)

As mentioned in Chapter 2 and 3, only 3 PTF were listed in the Kuala Lumpur Stock

Exchange (KLSE) before the inception of M-REITs in August 2005; namely AmFirst

Property Trust (AMFPT), Amanah Harta Tanah PNB (AHP) and Amanah Harta

Tanah PNB 2 (AHP2). Since it’s first listing, AMFPT performed better in comparison

with the other PTFs. Table 5.1 presents the PTFs’ performance since IPO. Even

during the Asian financial crisis in 1998, AMFPT was able to sustain with the lowest

price of 50 sen which is higher than other PTFs in the same period. It appears that the

source of this steady income was mainly generated from both of their highly occupied

buildings in Kuala Lumpur, namely the AmBank Group Building and AmBank Group

Leadership Centre. Meanwhile, difficulties in acquiring prime properties have

resulted in the AHP Trust expanding their property portfolio with non-prime or small

properties; e.g. shop offices, shop houses and secondary buildings.

103

In 1994, the stock market witnessed a record-breaking bull run, with AHP having the

highest share price of RM5.75 in 1994. However, the share price performance has

been subdued as a result of a shortage in quality assets which is then associated with

investors’ lack in interest. These factors have also hindered the performance of AHP2.

AHP2’s highest share price was during its first day of listing which then appears to

fall much further during the Asian Financial Crisis. Until the first half of 2006, the

trust managers were still having difficulties improving the occupancy level of their

property in Ipoh, Perak which is only 30% occupied. As at 31 July 2005, the share

price is the lowest since it was listed.

Table 5.1: PTFs Performance Since IPO (as of 29 July 2005)

PTFs IPOPrice (RM)

HighestPrice (RM)

LowestPrice (RM)

CurrentPrice (RM)

Price Returns (%)

FMPT* N/A 3.680 0.320 0.600 NA

AMFPT 1.100 2.800 0.460 1.370 25

AHP NA 7.300 0.450 0.760 0

AHP2 NA 1.400 0.380 0.400 0

Source: DataStream and author’s calculation*First Malaysia Property Trust – delisted 22 Julai 2002**AMFIRST Property Trust - terminated 16 January 2007

Figure 5.3 shows the Property Trust Fund Index from December 1989 - July 2005, as

well as the benchmark KLCI.

104

Figure 5.3: Property Trust Fund Index Against the KLCI

0

100

200

300

400

500

600

1-Nov-

89

1-Nov-

90

1-Nov-

91

1-Nov-

92

1-Nov-

93

1-Nov-

94

1-Nov-

95

1-Nov-

96

1-Nov-

97

1-Nov-

98

1-Nov-

99

1-Nov-

00

1-Nov-

01

1-Nov-

02

1-Nov-

03

1-Nov-

04

PTF KLCI


Apart from the lack of investors’ knowledge to the introduction of PTFs, the global

economic uncertainties and the restrictive guidelines have been a barrier to the

performance of PTFs in Malaysia. Figure 5.3 indicates the weak performance of the

PTFs against the KLCI since it’s inception until 1993, which sees the KLCI

outperforming the PTFs continuously. It seems that the Malaysian stock market was

highly preferred, as the growth of PTFs was much more reliant on high occupancy

and increasing rental rates. However, PTFs have managed to outperform the KLCI

during the period of 1994 – 1996; although during the Asian Financial Crisis, the

PTFs started to lose momentum. The significant increase during the period of 1994-

1996 was largely supported by the bull market. PTFs may not necessarily acquire best

assets in best locations, but the management needs to know how to enhance and make

the trust more attractive to investors. Amongst the 3 PTFs, after the delisting of

FMPT, AHP2 remained out of favour, as investors worried about the management

which have caused the long period of low occupancy rates. The performance of AHP2

over 1990-2006 with the KLCI was volatile. Overall, PTFs appear to fall much further

105

in the Asian economic crisis period of 1997 and 1998 and seeing recovery during the

post-crisis over the period of 1999 and 2000.

Different types of properties in different locations lead to different results. Learning

from the regional market, investors will lose interest if the PTF did not acquire new

properties to the existing portfolio. On a positive side, efforts have been taken to

increase investor interest to this industry; especially with the minimisation of

consumer spending following the increased price of oil and increased interest rates.

To stimulate the PTF market, the borrowing limit has been increased, although this

has led to increased expenditure, related to the transferred property to REITs.

Limitations to foreign investors still exist. Improved guidelines on REITs have

encouraged future demand.

5.2.1: Risk-adjusted Returns: PTF

Using the PTF index developed in this thesis, Table 5.2 presents the risk-adjusted

performance analysis for the overall PTF sector and other KLSE sectors over the

period of December 1989 - July 2005. The PTF sector showed the second highest

average annual returns (9.22% p.a.) in comparison to the other sectors, which ranged

from -3.95% to 11.17%. The lowest average annual return was given by the KLSE

property sector with -3.95%, while the highest was given by the KLSE financial

sector with 11.17%.

However, the PTF annual risk level (90.24%) has the highest risk level in comparison

to other sectors (29.05%to38.67%). The lowest risk was given by the KLCI (29.05%).

On a risk-adjusted basis, the PTF sector showed a Sharpe ratio of 0.04 over this

period, compared to the Sharpe ratios in the other sectors of -0.25 to 0.15. The highest

risk-adjusted return performance was given by the KLSE finance sector (0.15), while

the lowest risk-adjusted return performance was given by the KLSE property sector

(-0.25).

106

Table 5.2: Property Trust Fund (PTF) Performance:

December 1989 – July 2005

Sector AverageAnnual

Return (%)

AnnualRisk(%)

Return-to-RiskRatio

SharpeRatio

RiskAdjustedRanking

PTF 9.22 90.24 0.10 0.04 3

KLCI 6.23 29.05 0.21 0.03 4

KLSEPRP -3.95 38.35 -0.10 -0.25 5

KLSEPLN 9.10 32.14 0.28 0.11 2

KLSEFIN 11.17 38.67 0.29 0.15 1

Bonds 5.48 n.a n.a n.a n.a

5.2.2 Portfolio Diversification Benefits: PTFs

Table 5.3 presents the Property Trust Fund (PTF) inter-asset correlation matrix over

the period of December 1989 to July 2005. Overall, the PTF sector has a significant

correlation (r = 0.46 to 0.68) with the other asset classes and reflects differences in

portfolio diversification benefits to the other asset classes over this period.

Meanwhile, the KLCI (r = 0.78 to 0.93) has a higher correlation with the other KLSE

sub-indices. In comparison to the other sectors, PTF has a lower correlation with the

other sectors, which indicates that Property Trust Funds offer more portfolio

diversification benefits in a mixed-asset portfolio. It should be noted that some of this

may be attributable to the smaller size of the PTF sector compared to the other sectors

assessed and the subsequent higher levels of co-movement of these sectors and the

overall KLCI.

107

Table 5.3: Property Trust Fund (PTF) Correlation:

December 1989 – July 2005

PTF KLCI KLSEPRP KLSEPLN KLSEFIN

PTF 1.00

KLCI 0.48* 1.00

KLSEPRP 0.46* 0.83* 1.00

KLSEPLN 0.68* 0.78* 0.76* 1.00

KLSEFIN 0.56* 0.93* 0.88* 0.76* 1.00

*: significant correlation (P<5%)

5.3 Overall M-REIT Analysis (2005 to 2008)

Table 5.4 shows the considerable volatility of M-REIT share price performance. Axis

REIT reflects the strong interest by investors to the new re-branding of PTFs to

REITs, with the introduction of several property sectors such as industrial and office

property acquired by the REITs. Of the thirteen REITs, Quill Capita Trust gained the

highest price since listing, rising 8 sen over its initial public offer price (IPO) of

RM0.840. In contrast, Atrium REIT is currently valued at 0.610 sen, down from its

IPO of RM1.050 which performed poorly in comparison to the other REITs.

108

Table 5.4: M-REIT Performance Since IPO (as of 31 December 2008)

Source: DataStream and author’s calculation

REITs IPOPrice(RM)

HighestPrice(RM)

LowestPrice(RM)

CurrentPrice(RM)

PriceReturns

(%)

Conventional REITsAHP* NA 0.950 0.700 0.750 NA

AHP2* NA 0.700 0.400 0.485 NA

Axis REIT 1.250 2.280 1.000 1.120 -10.400

Starhill REIT 0.960 1.120 0.710 0.725 -24.479

UOA REIT 1.150 1.500 0.880 1.070 -6.957

Tower REIT 1.070 1.620 0.830 0.880 -17.757

Hektar REIT 1.050 1.740 0.730 0.770 -26.667

AmFirst REIT 1.000 1.000 0.740 0.800 -20.000

Quill Capita Trust 0.840 1.900 0.810 0.920 9.524

Amanahraya REIT 0.895 0.990 0.730 0.730 -18.436

Atrium REIT 1.050 1.120 0.600 0.610 -41.905

Islamic REITsAl-‘Aqar KPJ REIT 0.950 1.050 0.780 0.940 -1.053

Al-Hadharah BousteadREIT

0.990 1.550 0.990 0.990 0.000

109

In comparison to S-REITs, M-REITs are smaller in size and refinancing programmes

for M-REITs depend on the health of the Malaysian banks. 73% of M-REITs have a

short-term debt exposure totalling RM1.24B, which is 54% of total M-REIT debt.

Malaysian regulators have set the gearing level to 59% of asset value. M-REITs

currently have a debt to asset ratio of 11% to 41% (see Table 5.5)

Table 5.5: M-REITs: Gearing Details (as 31 December 2008)

Trust Total AssetsRM m

STDebt

RM m

TotalDebt

RM m

GearingRatio

%

Loan Details

ConventionalREITsAxis REIT 726 231 231 31.7 ST: COF + 0.5%Starhill REIT 1,637 - 180 11.0 LT: 5 yrs fixed at

4.8% pa: payable 16Dec 2010

UOA REIT 484 114 114 23.4 ST: COF + (0.3-0.5%)

Tower REIT 591 11 117 19.7 ST: COF + SpreadLT: 4.04 to 4.30% pa

Hektar REIT 738 302 302 40.8 ST: COF + 0.75%AmFirst REIT 1,014* 255 402 39.6* ST: COF +0.5%

LT: 4.28 to 5.00% paQuill CapitaTrust

816 188 304 37.2 LT: 4% pa till Nov2011ST: COF + 0.9% pa

AmanahrayaREIT

753 - 253 33.6 LT: 4 years fixed at4.5 to 5.25% pa:payable on 28 Feb2011

Atrium REIT 182 45 45 24.7 ST: COF +0.3%

Islamic REITsAl-‘Aqar KPJREIT

704 - 234 33.2 LT: 4.28 to 5.05%

Al-HadharahBoustead REIT

846 95 95 11.2 ST: Profit rate at5.3% pa

Total 8,491 1,239 2,275 26.8LT= long term; ST = short term; pa= per annum*Gearing adjusted for AmFirst REIT’s RM142m asset revaluation surplus announced on 19 March2009 (FY March 2009).Source: Maybank

110

Most M-REITs pay close to 100% of their net profits as dividends to unitholders

(see Table 5.6). Only 2 M-REITs have a quarterly dividend payment namely; Axis

REIT and Hektar REIT. In Singapore, S-REIT managers have sought to cut payout

ratios to around 50% to preserve cash, but the authorities decided not to lower the

minimum payout ratio of 90%. M-REITs should preserve more cash by cutting the

dividend payout closer to the minimum statutory payout of 90%. (source: Maybank)

Table 5.6: M-REITs: Latest Dividend Distribution Ratio

Trust Latest PayoutRatio (%)

Frequency of dividend payment

Amanah Harta Tanah PNB 100.0 Half-yearly

Amanah Harta Tanah PNB 2 100.0 Half-yearly

Axis REIT 99.3 Half-yearly (Quarterly from 2009)

Starhill REIT 100.0 Half-yearly

UOA REIT 98.0 Half-yearly

Tower REIT 94.0 Half-yearly

Hektar REIT 95.0 Quarterly

AmFirst REIT 100.0 Half-yearly

Quill Capita Trust 99.6 Half-yearly

Amanahraya REIT 100.0 Half-yearly

Atrium REIT 99.0 Half-yearly

Islamic REITs

Al-‘Aqar KPJ REIT 93.0 Half-yearly

Al-Hadharah Boustead REIT 92.0 Half-yearly

Source: Annual Reports, Maybank

111

Figure 5.4 shows the M-REIT index in comparison to the KLCI from 8 August 2005 -

29 December 2008.

Figure 5.4: Overall M-REIT Index in Comparison to KLCI

90

100

110

120

130

140

150

160

170

180

1-Aug

-05

1-Nov

-05

1-Feb

-06

1-M

ay-0

6

1-Aug

-06

1-Nov

-06

1-Feb

-07

1-M

ay-0

7

1-Aug

-07

1-Nov

-07

1-Feb

-08

1-M

ay-0

8

1-Aug

-08

1-Nov

-08

M-REIT KLCI


5.3.1 Risk-adjusted Returns: M-REITs

Using the M-REIT index developed in this thesis, Table 5.7 presents the risk-adjusted

performance analysis for the overall M-REIT sector over the period of 8 August 2005

- 29 December 2008. The overall M-REIT sector showed the second highest average

annual returns (2.36% p.a.) in comparison to other sectors which ranged from -1.33%

to 18.12%. The lowest average annual return was given by the KLSE property sector

with -1.33%, while the highest average annual return was given by KLSE plantation

sector with 18.12%. Meanwhile, the overall M-REIT annual risk level (12.30%) has

the lowest risk level in comparison to other sectors (18.01% to 30.46%). The highest

risk was given by the KLCI plantation sector (30.46%). The risk-adjusted rankings

112

will be based on the return-to-risk ratio as the Sharpe ratio can not be used to interpret

the performance of sectors when the average annual return are negative. This is

because, a negative higher return and a higher risk will generate a higher return-to-

risk ratio as the higher risk will compensate the negative return. From the risk-

adjusted ranking, the KLSE plantation is the best performed sector followed by the

overall M-REIT sector. The KLSE property sector is the worst performed sector

during the period of analysis.

Table 5.7: Overall M-REIT Risk Adjusted Return Analysis:

8 August 2005 – 29 December 2008


Return (%)

AnnualRisk(%)

Return-to-RiskRatio

SharpeRatio

RiskAdjustedRanking

Overall M-REIT 2.36 12.30 0.19 -0.13 2

KLCI 1.29 18.01 0.07 -0.15 4

KLSEPRP -1.33 25.89 -0.05 -0.21 5

KLSEPLN 18.12 30.46 0.59 0.46 1

KLSEFIN 2.32 19.73 0.12 -0.09 3


5.3.2 Portfolio Diversification Benefits: M-REITs

Table 5.8 presents the overall M-REIT inter-asset correlation matrix over the period

of 8 August 2005 – 29 December 2008. The overall M-REIT sector has a significant

correlation with the other asset class sectors (r = 0.40 to 0.58) and reflects some

degree of portfolio diversification benefits with the other asset classes over this

period. Meanwhile, the KLCI (r = 0.80 to 0.91) has a higher correlation with the other

sub-indices. In comparison to other sectors (r = 0.63 to 0.91), the overall M-REIT

sector has a low correlation with the other sectors, which indicates that overall M-

REITs offer more portfolio diversification benefits in a mixed-asset portfolio. Again,

parts of this are attributable to the smaller size of the M-REIT sector and the higher

expected co-movement by the other asset classes with the KLCI.

113

Table 5.8: Overall M-REIT Correlation Analysis:


OverallM-REIT

KLCI KLSEPRP KLSEPLN KLSEFIN

Overall M-REIT 1.00

KLCI 0.53* 1.00

KLSEPRP 0.58* 0.84* 1.00

KLSEPLN 0.40* 0.80* 0.63* 1.00

KLSEFIN 0.50* 0.91* 0.78* 0.65* 1.00*: significant correlation (P<5%)

The following sections will partition the overall M-REIT sector into conventional

M-REITs and Islamic M-REITs to assess their specific risk-adjusted performance and

portfolio diversification benefits.

5.4 Conventional M-REIT Analysis (2005-2008)

Using the conventional M-REIT index developed in this thesis, Figure 5.5 shows the

performance of the conventional M-REITs against the KLCI from 8 August 2005 – 29

December 2008.

114

Figure 5.5: Conventional M-REIT Index Against KLCI

90

100

110

120

130

140

150

160

170

180

8-A

ug-0

5

8-N

ov-05

8-Feb

-06

8-May

-06

8-A

ug-0

6

8-N

ov-06

8-Feb

-07

8-M

ay-0

7

8-A

ug-0

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8-N

ov-0

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8-Feb

-08

8-M

ay-0

8

8-A

ug-0

8

8-N

ov-0

8

CONVENTIONAL M-REIT KLCI


5.4.1 Risk-adjusted Returns: M-REITs

Using the conventional M-REIT index developed in this thesis, Table 5.9 presents the

risk-adjusted performance analysis for the overall M-REIT sector over the period of 8

August 2005 - 29 December 2008. The overall M-REIT sector showed the third

highest average annual returns (2.23% p.a.) in comparison to other sectors which

ranged from -1.33% to 18.12%. The lowest average annual return was given by the

KLSE property sector with -1.33%, while the highest average annual return was given

by KLSE plantation sector with 18.12%. Meanwhile, the conventional M-REIT

annual risk level (12.99%) has the lowest risk level in comparison to other sectors

(18.01% to 30.46%). The highest risk was given by the KLCI plantation sector

(30.46%). From the risk-adjusted rankings, the KLSE plantation is the best

performed sector followed by the KLSE Finance sector. The KLSE property sector is

the worst performed sector during the period of analysis.

115

Table 5.9: Conventional M-REIT Risk-Adjusted Return Analysis:



Return (%)

AnnualRisk(%)

Return-to-RiskRatio

SharpeRatio

RiskAdjustedRanking

ConventionalM-REIT 2.23 12.99 0.17 -0.14 3

KLCI 1.29 18.01 0.07 -0.15 4

KLSEPRP -1.33 25.89 -0.05 -0.21 5

KLSEPLN 18.12 30.46 0.59 0.46 1

KLSEFIN 2.32 19.73 0.12 -0.09 2


5.4.2 Portfolio Diversification Benefits: Conventional M-REITs

Table 5.10 presents the conventional M-REIT inter-asset correlation matrix over the

period of 8 August 2005 – 29 December 2008. The conventional M-REIT sector has a

significant correlation with the other asset class sectors (r = 0.38 to 0.59) and reflects

some degree of portfolio diversification benefits with the other asset classes over this

period. Meanwhile, the KLCI (r = 0.80 to 0.91) has a higher correlation with the other

sub-indices. In comparison to other sectors (r = 0.63 to 0.78), the conventional

M-REIT sector has a low correlation with the other sectors, which indicates that

conventional M-REITs offer more portfolio diversification benefits in a mixed-asset

portfolio. Again, part of this may be attributable to the smaller size of the M-REIT

sector and the higher expected co-movement by the other asset classes with the KLCI.

116

Table 5.10: Conventional M-REIT Correlation Analysis:


ConventionalM-REIT


ConventionalM-REIT 1.00

KLCI 0.54* 1.00

KLSEPRP 0.59* 0.84* 1.00

KLSEPLN 0.38* 0.80* 0.63* 1.00

KLSEFIN 0.52* 0.91* 0.78* 0.65* 1.00


5.5 Islamic M-REIT Analysis (2006-2008)

Similarly, using the Islamic M-REIT index developed in this thesis, Figure 5.6 shows

the Islamic M-REIT index against the KLCI from 21 August 2006 – 29 December

2008.

Figure 5.6: Islamic M-REIT Index Against KLCI

80

90

100

110

120

130

140

150

160

170

180

14-A

ug-0

6

14-O

ct-06

14-D

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14-F

eb-0

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14-J

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14-A

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14-O

ct-07

14-D

ec-0

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14-F

eb-0

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14-A

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14-A

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14-O

ct-08

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8

ISLAMIC M-REIT KLCI


117

5.5.1 Risk-adjusted Returns: Islamic M-REITs

Table 5.11 presents the risk-adjusted performance analysis for the Islamic M-REIT

sector over the period of 21 August 2006 - 29 December 2008. The Islamic M-REIT

sector showed the second lowest average annual return (-0.59% p.a.) in comparison to

the other sectors, which ranged from -2.01% to 6.88%. The lowest average annual

return was given by the KLSE property sector with -2.01%, while the highest was

given by the KLSE plantation sector with 6.88%. The Islamic M-REIT annual risk

level (13.73%) has the third lowest risk level in comparison to other sectors (11.55%

to 34.44%). The highest risk was given by the KLSE plantation sector (34.44%),

while the lowest risk was given by the overall M-REIT sector with 11.55%. From the

risk- adjusted ranking based from the return-to-risk ratio, the KLSE plantation is the

best performed sector followed by the overall M-REIT sector. Islamic M-REIT was

the second worst performed sector, while the KLSE property sector is the worst

performed sector during the period of analysis.

Table 5.11: Islamic M-REIT Risk-Adjusted Return Analysis:



Return (%)

AnnualRisk(%)

Return-to-RiskRatio

SharpeRatio

RiskAdjustedRanking

Overall M-REIT 2.18 11.55 0.19 -0.15 2

Islamic M-REIT -0.59 13.73 -0.04 -0.33 6

Conventional M-REIT 1.98 12.59 0.16 -0.15 3

KLCI -0.03 20.71 0.00 -0.19 5

KLSEPRP -2.01 29.42 -0.07 -0.20 7

KLSEPLN 6.88 34.44 0.20 0.09 1

KLSEFIN 1.79 22.81 0.08 -0.09 4


118

5.5.2 Portfolio Diversification Benefits: Islamic REITs

Table 5.12 presents the Islamic M-REIT inter-asset correlation matrix over the period

of 21 August 2006 – 29 December 2008. Overall, the Islamic M-REIT sector has a

significant correlation (r = 0.26 to 0.36) with the other sectors and reflects portfolio

diversification benefits with the other asset classes over this period. Conventional M-

REITs (r = 0.43 to 0.70) have a higher correlation than Islamic M-REITs. In

comparison to other sectors (r = 0.65 to 0.91), the Islamic M-REIT sector has a low

correlation with the other sectors, which indicates that Islamic M-REITs offer more

portfolio diversification benefits in a mixed-asset portfolio.

Table 5.12: Islamic M-REIT Correlation Analysis:


OverallM-REIT

IslamicM-REIT

ConventionalM-REIT


OverallM-REIT 1.00

IslamicM-REIT 0.53* 1.00

ConventionalM-REIT 0.98* 0.34* 1.00

KLCI 0.60* 0.29* 0.60* 1.00

KLSEPRP 0.69* 0.33* 0.70* 0.86* 1.00

KLSEPLN 0.46* 0.36* 0.43* 0.81* 0.65* 1.00

KLSEFIN 0.59* 0.26* 0.60* 0.91* 0.80* 0.67* 1.00


5.6 Significance of the Global Financial Crisis via Sub-period Performance

Analysis for M-REITs

To assess the potential changing investment dynamics of the M-REIT sector, the full

period of 8 August 2005 – 29 December 2008 was broken into the two sub-periods of

8 August 2005 – 27 August 2007 and 3 September 2007 – 29 December 2008;

119

particularly to assess whether these portfolio benefits have been enhanced in more

recent years as the Asian property markets have improved their levels of maturity and

to assess the impact of the global financial crisis (JLL, 2008).

5.6.1 Risk-adjusted Returns

Table 5.13 and 5.14 present the risk-adjusted performance analysis for the M-REIT

sector for these two sub-periods. Table 5.13 presents the risk-adjusted performance

analysis for the overall M-REIT sector over the period of pre-global financial crisis (8

August 2005 – 27 August 2007). The M-REIT sector showed the lowest average

annual returns (14.54%) in comparison to the other sectors, which ranged from

20.05% to 50.77%. The highest average annual return was given by the KLSE

plantation sector with 50.77%. However, the overall M-REIT annual risk level

(14.03%) was the lowest risk level in comparison to other sectors (15.48% to

27.17%). The highest risk was given by the KLSE property sector (27.17%). On a

risk-adjusted basis, the M-REIT sector showed the lowest Sharpe ratio of 0.75 over

this period, compared to the Sharpe ratios in the other sectors (0.99 to 2.05). The

highest risk-adjusted return performance was given by the KLSE plantation sector

(2.05).


8 August 2005 – 27 August 2007


Return (%)

AnnualRisk(%)

Return-to-RiskRatio

SharpeIndex

RiskAdjustedRanking

Overall M-REIT 14.54 14.03 1.04 0.75 5

KLCI 20.05 15.48 1.30 1.04 3

KLSEPRP 36.77 27.17 1.35 1.21 2

KLSEPLN 50.77 22.78 2.23 2.05 1

KLSEFIN 21.22 17.37 1.22 0.99 4


120

Table 5.14 presents the risk-adjusted performance analysis for the overall M-REIT

sector over the period of the Post-Global Financial Crisis (3 September 2007 – 29

December 2008). The M-REIT sector showed the highest average annual return

(-13.94%) in comparison to the other sectors, which ranged from -18.95% to -40.38%.

The lowest average annual return was given by the KLSE property sector with

-40.38%. In addition, the overall M-REIT annual risk level (8.53%) has the lowest

risk levels in comparison to other sectors (20.95% to 39.20%). The highest risk was

given by the KLSE plantation sector (39.2%). Whilst there are difficulties interpreting

negative Sharpe ratios, the overall M-REIT sector was the best performed, having

highest return and lowest risk.


3 September 2007 – 29 December 2008


Return (%)

AnnualRisk(%)

Return-to-RiskRatio

SharpeRatio

Overall M-REIT -13.94 8.53 -1.63 -2.09

KLCI -22.06 20.95 -1.05 -1.24

KLSEPRP -40.38 22.14 -1.82 -2.00

KLSEPLN -18.95 39.20 -0.48 -0.58

KLSEFIN -21.22 22.57 -0.94 -1.11

Bond 3.94 n.a n.a n.a

The average annual return for the overall M-REIT have generated the lowest average

annual return during the pre-global financial crisis and the highest average annual

return during the post-global financial crisis. For both periods the overall M-REIT

generated the lowest risk. Although the average annual returns for the overall

M-REIT decreased from 14.54% to -13.94%, the risk has also reduced from 14.03%

in the first sub-period to 8.53% in the second sub-period.

121

5.6.2 Portfolio Diversification Benefits

To assess the impact of the global financial crisis on the portfolio diversification

benefits of M-REITs, Table 5.15 presents the overall M-REIT inter-asset correlation

matrix over the period of the pre-global financial crisis (8 August 2005 – 27 August

2007). The overall M-REIT sector has a significant correlation with the other asset

classes (r = 0.41 to 0.53) and reflects portfolio diversification benefits with the other

asset classes over this period. The KLCI (r = 0.81 to 0.94) has a higher correlation

with the other sub-indices. In comparison to the other sectors (r = 0.70 to 0.94),

overall M-REITs has a low correlation with the other sectors, which indicates that

overall M-REITs offer more portfolio diversification benefits in a mixed-asset

portfolio.


8 August 2005 – 27 August 2007

OverallM-REIT


Overall M-REIT 1.00

KLCI 0.53* 1.00

KLSEPRP 0.54* 0.85* 1.00

KLSEPLN 0.41* 0.81* 0.70* 1.00

KLSEFIN 0.49* 0.94* 0.81* 0.70* 1.00


Table 5.16 presents the overall M-REIT inter-asset correlation matrix over the period

of post-global financial crisis (3 September 2007 – 29 December 2008). The overall

M-REIT sector has a significant correlation with the other asset classes (r = 0.49 to

0.63) and reflects portfolio diversification benefits with the other asset classes over

this period. The KLCI (r = 0.80 to 0.88) has a higher correlation with the other sub-

indices. In comparison to the other sectors (r = 0.62 to 0.78), overall M-REITs has a

low correlation with the other sectors, which indicates that overall M-REITs offer

more portfolio diversification benefits in a mixed-asset portfolio.

122



OverallM-REIT


Overall M-REIT 1.00

KLCI 0.60* 1.00

KLSEPRP 0.63* 0.88* 1.00

KLSEPLN 0.49* 0.80* 0.64* 1.00

KLSEFIN 0.59* 0.88* 0.78* 0.62* 1.00


There is an increase in correlation between the overall M-REIT sector with the other

sectors during the global financial crisis. In summary, although the impact of global

financial crisis have affected the performance of M-REITs, in both sub-periods, the

overall M-REIT sector offers more portfolio diversification benefits in a mixed-asset

portfolio, although some of this diversification benefit has been lost in the global

financial crisis. This is reflected in the correlation of M-REITs with the KLCI

increasing from 0.53 to 0.60 during the GFC.

5.7 Significance of Global Financial Crisis via Sub-period Performance Analysis

for Islamic M-REITs

5.7.1 Risk-adjusted Returns

The equivalent sub-period risk-adjusted performance analysis for Islamic REITs is

given in Table 5.17 and 5.18. To assess the potential changing investment dynamics

of the Islamic M-REIT sector, the full period of 21 August 2006 – 29 December 2008

was broken into the two sub-periods of 21 August 2006 – 27 August 2007 and

3 September 2007 – 29 December 2008; particularly to assess whether these portfolio

diversification benefits have been enhanced during the global financial crisis.

123


sector over the period of the pre-global financial crisis (21 August 2006 –

27 August 2007). The Islamic M-REIT sector showed the second lowest average

annual returns (5.88% p.a.) in comparison to other sectors, which ranged from

27.64% to 86.58%. The highest average annual return was given by the KLSE

property sector with 86.58%. The Islamic M-REIT annual risk level (14.22%) has the

second lowest risk level in comparison to the other sectors (14.03% to 34.87%). The

highest risk was given by the KLCI property sector (34.87%). On a risk-adjusted

basis, the Islamic M-REIT sector showed the lowest Sharpe ratio of 0.15 over this

period, compared to the Sharpe ratios in the other sectors of 1.70 to 2.38. The highest

risk-adjusted return performance was given by KLSE property sector (2.38) followed

by the KLSE plantation sector (1.84). In comparison to conventional M-REITs,

conventional M-REITs delivered a better return and at a marginal increase risk than

Islamic M-REITs.


21 August 2006 – 27 August 2007


Return (%)

AnnualRisk(%)

Return-to-RiskRatio

SharpeRatio

RiskAdjustedRanking

Overall M-REIT 27.64 14.03 1.97 1.70 5

Islamic M-REIT 5.88 14.22 0.41 0.15 7

Conventional M-REIT 31.57 15.14 2.09 1.84 3

KLCI 38.04 19.69 1.93 1.74 4

KLSEPRP 86.58 34.87 2.48 2.38 1

KLSEPLN 52.97 26.70 1.98 1.84 2

KLSEFIN 41.90 22.50 1.86 1.70 6

Bond 3.77 n.a n.a n.a n.a

124


sector over the period of the post-global financial crisis (3 September 2007-

29 December 2008). The Islamic M-REIT sector showed the highest average annual

returns (-5.31%) in comparison to other sectors which range from -13.94% to

-40.38%. The lowest average annual return was given by the KLSE property sector

with -40.38%. The Islamic M-REIT annual risk level (13.41%) has the third lowest

risk level in comparison to the other sectors (8.53% to 39.20%). The highest risk was

given by the KLCI property sector (39.2%) while the lowest risk was given by the

overall M-REIT sector.




Return (%)

AnnualRisk(%)

Return-to-RiskRatio

SharpeIndex

RiskAdjustedRanking

Overall M-REIT -13.94 8.53 -1.63 -2.09 6

Islamic M-REIT -5.31 13.41 -0.40 -0.69 1

Conventional M-REIT -16.21 9.40 -1.72 -2.14 7

KLCI -22.06 20.95 -1.05 -1.24 4

KLSEPRP -40.38 22.14 -1.82 -2.00 5

KLSEPLN -18.95 39.20 -0.48 -0.58 2

KLSEFIN -21.22 22.57 -0.94 -1.11 3

Bond 3.94 n.a n.a n.a n.a

According to the risk-adjusted ranking based on the return-to-risk ratio, the Islamic

M-REIT sector is the worst performed sector during the pre-global financial crisis

while it is ranked the best performed sector compared to the other sectors during the

post-global financial crisis. In terms of risk, the Islamic M-REIT managed to achieve

the second lowest annual risk during the pre-global financial crisis and having the

third lowest annual risk, during the post-global financial crisis. Commensurate with

the performance on both periods, in terms of average annual return, the Islamic M-

REIT sector has generated the lowest average annual return during the pre-global

125

financial crisis and achieved the highest average annual return during the post-global

financial crisis. Despite this achievement, the average annual returns for Islamic M-

REIT decreased from 5.88% to -5.31%, although risk levels are reduced from 14.22%

to 13.41% in the second sub-period. This saw the KLSE property sector as the leading

sector followed by KLSE plantation sector the during pre-global financial crisis

period. The Conventional M-REIT sector is the worst performed sector during the

post-global financial crisis.

5.7.2 Portfolio Diversification Benefits

To assess the impact of the global financial crisis on the portfolio diversification

benefits of Islamic M-REITs, Table 5.19 presents the Islamic M-REIT inter-asset

correlation matrix over the period of the pre-global financial crisis (21 August 2006 –

27 August 2007). Overall, the Islamic M-REIT sector has a significant correlation

(r = 0.33 to 0.43) and indicates some portfolio diversification benefits with the other

asset classes over this period. Meanwhile, the overall M-REIT sector (r = 0.48 to

0.69) has a higher correlation with the other sub-indices. In comparison to the other

sectors (r = 0.49 to 0.96), Islamic M-REITs have a lower correlation with the other

sectors, which concludes that Islamic M-REITs offer more portfolio diversification

benefits in a mixed-asset portfolio.

126


21 August 2006 – 27 August 2007


Table 5.20 presents the Islamic M-REIT inter-asset correlation matrix over the period

of the post-global financial crisis (3 September 2007 – 29 December 2008). Overall,

the Islamic M-REIT sector has a low correlation (r = 0.16 to 0.39) with the other asset

classes and reflects portfolio diversification benefits with the other asset classes over

this period. Meanwhile, the conventional M-REIT sector (r = 0.42 to 0.63) has a

higher correlation than Islamic M-REITs. In comparison to other sectors (r = 0.62 to

0.88), Islamic M-REITs have a lower correlation with the other sectors, which

concludes that Islamic M-REITs offer more portfolio diversification benefits in a

mixed-asset portfolio.

OverallM-REIT

IslamicM-REIT

ConventionalM-REIT


OverallM-REIT 1.00


ConventionalM-REIT 0.99* 0.43* 1.00

KLCI 0.61* 0.36* 0.61* 1.00

KLSEPRP 0.69* 0.41* 0.70* 0.88* 1.00

KLSEPLN 0.48* 0.33* 0.49* 0.85* 0.78* 1.00

KLSEFIN 0.59* 0.37* 0.59* 0.96* 0.83* 0.77* 1.00

127



OverallM-REIT

IslamicM-REIT

ConventionalM-REIT


OverallM-REIT 1.00


ConventionalM-REIT 0.95* 0.22 1.00

KLCI 0.60* 0.23 0.60* 1.00

KLSEPRP 0.63* 0.24* 0.63* 0.88* 1.00

KLSEPLN 0.49* 0.39* 0.42* 0.80* 0.64* 1.00

KLSEFIN 0.59* 0.16 0.61* 0.88* 0.78* 0.62* 1.00


There is a reduction in correlation between the Islamic M-REIT sector and the other

sectors during the post-global financial crisis. In summary, although Islamic REITs

performed poorly in comparison to other sectors during the pre-global financial crisis,

Islamic REITs recovered quickly delivering the best average annual return with the

third lowest annual risk during the post-global financial crisis. Furthermore, Islamic

M-REITs offer more portfolio diversification benefits in a mixed-asset portfolio, with

this portfolio diversification benefit having been enhanced in the global financial

crisis. These are positive attributes for Islamic M-REITs; particularly in the context of

the uncertainty and volatility of the global financial crisis.

5.8 Mixed-asset Portfolios for M-REITs

The following sections will use the M-REIT performance series developed in this

thesis to assess the role of M-REITs in a mixed-asset portfolio; in particular, using a

range of scenarios as the M-REIT levels are increased from 0% to 30%. These levels

were chosen to reflect possible typical practical levels of M-REITs in a portfolio.

128

5.8.1 Mixed-asset Portfolios for Overall M-REITs

Table 5.21 presents the various portfolio mixes and performance analysis for the

period from 8 August 2005 to 29 December 2008, with the focus on examining the

performance of overall M-REITs and the KLCI in a portfolio. The allocations to the

financial assets are set, with varying allocations to the overall M-REIT and other

KLSE sub-indices. For comparison, to analyse the value-added contribution of the

overall M-REIT sector against the KLCI during the whole period of pre- and post-

global financial crisis, the other sectors will be given the same equal portfolio weight.

This is labelled as scenario 1. This process will also be applied to other scenarios

when the overall M-REIT sector is analysed against other sectors. This is important to

see the contribution of the target sectors clearly, and importantly to compare between

scenarios.

From Table 5.21, it is apparent that as the KLCI allocations decreased at the expense

of a proportional increase in the overall M-REIT allocation and other KLSE sub-

indices capped accordingly, portfolio performance improved. The return-to-risk ratios

increased from 0.23 to 0.29 as the allocations to the overall M-REIT sector are raised

from zero to 30%. Since having the right asset mix will help to determine the

performance of the overall M-REIT sector in this case, the increase in allocations of

the overall M-REIT sector and decrease in allocations of the KLCI in the mixed-asset

portfolio will see a positive increase in the return-to-risk ratio. Table 5.21 also shows

that as the risk is reduced, returns increased as the allocation of the overall M-REIT

sector increased.

129

Table 5.21: Scenario 1: Overall M-REIT vs KLCI Performance:


OverallM-REIT

(%)

KLCI(%)

KLSEPRP(%)

KLSEPLN(%)

KLSEFIN(%)

Risk(%)

Return(%)

Return-to risk-Ratio

0.00 30.00 23.33 23.33 23.33 20.96 4.85 0.23

5.00 25.00 23.33 23.33 23.33 20.43 4.90 0.24

10.00 20.00 23.33 23.33 23.33 19.92 4.95 0.25

15.00 15.00 23.33 23.33 23.33 19.43 5.01 0.26

20.00 10.00 23.33 23.33 23.33 18.95 5.06 0.27

25.00 5.00 23.33 23.33 23.33 18.49 5.11 0.28

30.00 0.00 23.33 23.33 23.33 18.06 5.17 0.29

Table 5.22 presents the various portfolio mix scenarios and performance analysis for

the period from 8 August 2005 to 29 December 2008, with the focus on examining the

performance of the overall M-REIT sector and the KLSE property sector in a

portfolio. This is labelled as scenario 2. The allocations to financial assets are set with

varying allocations to the overall M-REIT and other KLSE sub-indices. For

comparison, to analyse the value-added contribution of the overall M-REIT sector

against the KLSE property sector during the whole period of pre- and post-global

financial crisis, other sectors will be given the same equal weight. It is apparent that

as the KLSE property sector allocations decreased at the expense of a proportional

increase in M-REIT allocation and other KLSE sub-indices capped accordingly,

portfolio performance improved. The return-to-risk ratios increased from 0.22 to 0.34

as the allocations to the overall M-REIT sector are raised from zero to 30%. Since

having the right asset mix will help to determine the performance of the overall M-

REIT sector in this case, the increase in allocations of the overall M-REIT sector and

decrease in allocations of the KLSE property sector in the mixed-asset portfolio will

see a positive increase in the return-to-risk ratio. Table 5.22 also shows that as the risk

is reduced, returns increased as the allocation of the overall M-REIT sector increased.

130

Table 5.22: Scenario 2: Overall M-REIT vs KLSE Property Sector Performance:


OverallM-REIT

(%)

KLCI(%)

KLSEPRP(%)

KLSEPLN(%)

KLSEFIN(%)

Risk(%)

Return(%)


0.00 23.33 30.00 23.33 23.33 21.35 4.67 0.22

5.00 23.33 25.00 23.33 23.33 20.53 4.86 0.24

10.00 23.33 20.00 23.33 23.33 19.73 5.04 0.26

15.00 23.33 15.00 23.33 23.33 18.95 5.23 0.28

20.00 23.33 10.00 23.33 23.33 18.21 5.41 0.30

25.00 23.33 5.00 23.33 23.33 17.50 5.59 0.32

30.00 23.33 0.00 23.33 23.33 16.82 5.78 0.34



performance of the overall M-REIT sector and the KLSE plantation sector in a

portfolio. This is labelled as scenario 3. The allocations to financial assets are set

with varying allocations to the overall M-REIT sector and other KLSE sub-indices.

For comparison, to analyse the value-added contribution of the overall M-REIT sector

against the KLSE plantation sector during the whole period of pre- and post-global

financial crisis, other sectors will be given the same equal weight. It is apparent that

as the KLSE plantation allocations decreased at the expense of a proportional increase

in the overall M-REIT allocation and other KLSE sub-indices capped accordingly,

portfolio performance decreased significantly. The return-to-risk ratios decreased

from 0.28 to 0.08 as the allocations to the overall M-REIT sector are raised from zero

to 30%. Since having the right asset mix will help to determine the performance of the

overall M-REIT sector in this case, the increase in allocations of the overall M-REIT

sector and decrease in allocations of the KLSE plantation sector in the mixed-asset

portfolio showed a decrease in return-to-risk ratio, reflecting the superior risk-

adjusted added value of the KLSE plantation sector compared to the overall M-REIT

sector. Table 5.23 also shows that while the risk is reduced, returns reduced

significantly as the allocation of the overall M-REIT sector increased.

131

Table 5.23: Scenario 3: Overall M-REIT vs KLSE Plantation Sector

Performance: 8 August 2005 – 29 December 2008

OverallM-REIT

(%)

KLCI(%)

KLSEPRP(%)

KLSEPLN(%)

KLSEFIN(%)

Risk(%)

Return(%)


0.00 23.33 23.33 30.00 23.33 21.60 5.97 0.28

5.00 23.33 23.33 25.00 23.33 20.59 5.18 0.25

10.00 23.33 23.33 20.00 23.33 19.62 4.39 0.22

15.00 23.33 23.33 15.00 23.33 18.71 3.61 0.19

20.00 23.33 23.33 10.00 23.33 17.87 2.82 0.16

25.00 23.33 23.33 5.00 23.33 17.09 2.03 0.12

30.00 23.33 23.33 0.00 23.33 16.40 1.24 0.08



performance of the overall M-REIT sector and the KLSE finance sector in a portfolio.

This is labelled as scenario 4. The allocations to financial assets are set with varying

allocations to the overall M-REIT sector and other KLSE sub-indices. For comparison

to analyse the value-added contribution of the overall M-REIT sector against the

KLSE finance sector during the whole period of pre- and post-global financial crisis,

other sectors will be given the same equal weight. It is apparent that as the KLSE

finance sector allocations decreased at the expense of a proportional increase in the

overall M-REIT sector allocation and other KLSE sub-indices capped accordingly,

portfolio performance improved. The return-to-risk ratios increased from 0.23 to 0.27

as the allocations of the overall M-REIT sector are raised from zero to 30%. Since

having the right asset mix will help to determine the performance of the overall M-

REIT sector in this case, the increase in allocations of the overall M-REIT sector and

decrease in allocations of the KLSE finance sector in the mixed-asset portfolio will


is reduced, returns were stable as the allocation of the overall M-REIT sector

increased.

132

Table 5.24: Scenario 4: Overall M-REIT vs KLSE Finance Sector Performance:


OverallM-REIT

(%)

KLCI(%)

KLSEPRP(%)

KLSEPLN(%)

KLSEFIN(%)

Risk(%)

Return(%)


0.00 23.33 23.33 23.33 30.00 20.99 4.91 0.23

5.00 23.33 23.33 23.33 25.00 20.44 4.92 0.24

10.00 23.33 23.33 23.33 20.00 19.91 4.92 0.25

15.00 23.33 23.33 23.33 15.00 19.41 4.92 0.25

20.00 23.33 23.33 23.33 10.00 18.93 4.92 0.26

25.00 23.33 23.33 23.33 5.00 18.48 4.93 0.27

30.00 23.33 23.33 23.33 0.00 18.05 4.93 0.27

In comparing all scenarios from Tables 5.21, 5.22, 5.23 and 5.24, the addition of the

overall M-REIT sector to the financial assets portfolio has resulted in increased risk-

adjusted portfolio performance in most cases. The increase in the overall M-REIT

sector sees portfolio risk reduced with higher portfolio return except when comparing

it against the KLSE plantation sector. The overall M-REIT sector is considered a

value-added component throughout the period of pre- and post-global financial crisis

to a mixed-asset portfolio, as it delivers significant portfolio diversification benefits

which attract individual investors who are risk averse.

5.8.2 Mixed-asset Portfolios for Islamic M-REITs


the period from 21 August 2006 to 29 December 2008, with the focus on examining

the performance of Islamic M-REITs and conventional M-REITs in a portfolio. This

is labelled as scenario 5. The allocations to financial assets are set with varying

allocations to M-REITs and other KLSE sub-indices. For comparison to analyse the

value-added contribution of the Islamic M-REIT sector against the conventional M-

REIT during the whole period of pre- and post-global financial crisis, the other sectors

will be given the same equal weight. This process will also be applied to other

scenarios when the Islamic M-REIT sector is analysed against other sectors. This is

important to see the contribution of the target sectors clearly and importantly to

133

compare between scenarios. From Table 5.25, it is apparent that as the conventional

M-REIT allocations decreased at the expense of a proportional increase in Islamic M-

REIT allocation and other KLSE sub-indices capped accordingly, portfolio

performance decreased. The return-to-risk ratios decreased from 0.09 to 0.05 as the

allocations of the Islamic M-REIT sector are raised from zero to 30%. Since having

the right asset mix will help to determine the performance of M-REITs in this case,

the increased allocations of the Islamic M-REIT sector and decreased allocations of

the conventional M-REIT sector in the mixed-asset portfolio will see a decrease in the

return-to-risk ratio. Table 5.25 also shows that as the risk reduced, returns also

reduced as the allocation of the Islamic M-REIT sector increased, resulting in a

reduction in risk-adjusted performance.

Table 5.25: Scenario 5: Islamic M-REIT vs. Conventional M-REIT


IslamicM-REIT

(%)

ConventionalM-REIT

(%)

KLCI(%)

KLSEPRP(%)

KLSEPLN(%)

KLSEFIN(%)

Risk(%)

Return(%)

Return-to-riskRatio

0 30 17.5 17.5 17.5 17.5 19.77 1.75 0.09

5 25 17.5 17.5 17.5 17.5 19.46 1.63 0.08

10 20 17.5 17.5 17.5 17.5 19.19 1.50 0.08

15 15 17.5 17.5 17.5 17.5 18.95 1.37 0.07

20 10 17.5 17.5 17.5 17.5 18.74 1.24 0.07

25 5 17.5 17.5 17.5 17.5 18.58 1.11 0.06

30 0 17.5 17.5 17.5 17.5 18.45 0.98 0.05


the period from 21 August 2006 to 29 December 2008, with the focus in examining

the performance of the Islamic M-REIT sector and the KLCI in a portfolio. This is

labelled as scenario 6. The allocations to financial assets are set with varying


value-added contribution of the Islamic M-REIT sector against the KLCI sector

during the whole period of pre- and post-global financial crisis, other sectors will be

given the same equal weight. It is apparent that as the KLCI allocations decreased at

134

the expense of a proportional increase in Islamic M-REIT allocations and other KLSE

sub-indices capped accordingly, portfolio performance remained stable. The return-to-

risk ratios increased from 0.07 to 0.08 as the allocations of the Islamic M-REIT sector

are raised from zero to 30%. Since having the right asset mix will help to determine

the performance of the Islamic M-REIT sector in this case, the increase in allocations

of the Islamic M-REIT sector and decrease in allocations of the KLCI in the mixed-

asset portfolio will see a stable return-to-risk ratio. Table 5.26 also shows that as the

risk reduced, returns also reduced as the allocation of the Islamic M-REIT sector

increased.

Table 5.26: Scenario 6: Islamic M-REIT vs KLCI Performance:


IslamicM-REIT

(%)

ConventionalM-REIT

(%)

KLCI(%)

KLSEPRP(%)

KLSEPLN(%)

KLSEFIN(%)

Risk(%)

Return(%)

Return-to-riskRatio

0 17.5 30 17.5 17.5 17.5 20.73 1.50 0.07

5 17.5 25 17.5 17.5 17.5 20.04 1.47 0.07

10 17.5 20 17.5 17.5 17.5 19.38 1.45 0.07

15 17.5 15 17.5 17.5 17.5 18.76 1.42 0.08

20 17.5 10 17.5 17.5 17.5 18.17 1.39 0.08

25 17.5 5 17.5 17.5 17.5 17.63 1.36 0.08

30 17.5 0 17.5 17.5 17.5 17.13 1.34 0.08



the performance of the Islamic M-REIT sector and the KLSE property sector in a


with varying allocations to M-REITs and other KLSE sub-indices. For comparison to

analyse the value-added contribution of the Islamic M-REIT sector against the KLSE

property sector during the whole period of pre- and post-global financial crisis, other

sectors will be given the same equal weight. It is apparent that as the KLSE property

sector allocations decreased at the expense of a proportional increase in Islamic M-

REIT allocations and the other KLSE sub-indices capped accordingly, portfolio

135

performance improved. The return-to-risk ratios increased from 0.06 to 0.11 as the


the right asset mix will help to determine the performance of the Islamic M-REIT

sector in this case, the increase in allocations of the Islamic M-REIT sector and


see a positive increase in return-to-risk ratio. Table 5.27 also shows that as the risk

reduced, returns increased as the allocation of the Islamic M-REIT sector increased.

Table 5.27: Scenario 7: Islamic M-REIT vs KLSE Property Sector Performance:


IslamicM-REIT

(%)

ConventionalM-REIT

(%)

KLCI(%)

KLSEPRP(%)

KLSEPLN(%)

KLSEFIN(%)

Risk(%)

Return(%)

Return-to-riskRatio

0 17.5 17.5 30 17.5 17.5 22.46 1.25 0.06

5 17.5 17.5 25 17.5 17.5 21.07 1.33 0.06

10 17.5 17.5 20 17.5 17.5 19.72 1.40 0.07

15 17.5 17.5 15 17.5 17.5 18.42 1.47 0.08

20 17.5 17.5 10 17.5 17.5 17.18 1.54 0.09

25 17.5 17.5 5 17.5 17.5 16.02 1.61 0.10

30 17.5 17.5 0 17.5 17.5 14.94 1.68 0.11



the performance of the Islamic M-REIT sector and the KLSE plantation sector in a




plantation sector during the whole period of pre- and post-global financial crisis, other

sectors will be given the same equal weight. It is apparent that as the KLSE plantation





136



decrease in allocations of the KLSE plantation sector in the mixed-asset portfolio will

see a decrease in the return-to-risk ratio. Table 5.28 also shows that as the risk

reduced, returns also reduced as the allocation of the Islamic M-REIT sector

increased.

Table 5.28: Scenario 8: Islamic M-REIT vs KLSE Plantation Sector




the performance of the Islamic M-REIT sector and the KLSE finance sector in a




finance sector during the whole period of pre- and post-global financial crisis, other

sectors will be given the same equal weight. It is apparent that as the KLSE finance






IslamicM-REIT

(%)

ConventionalM-REIT

(%)

KLCI(%)

KLSEPRP(%)

KLSEPLN(%)

KLSEFIN(%)

Risk(%)

Return(%)

Return-to-riskRatio

0 17.5 17.5 17.5 30 17.5 21.20 2.37 0.11

5 17.5 17.5 17.5 25 17.5 20.31 1.99 0.10

10 17.5 17.5 17.5 20 17.5 19.47 1.62 0.08

15 17.5 17.5 17.5 15 17.5 18.67 1.25 0.07

20 17.5 17.5 17.5 10 17.5 17.93 0.87 0.05

25 17.5 17.5 17.5 5 17.5 17.25 0.50 0.03

30 17.5 17.5 17.5 0 17.5 16.64 0.13 0.01

137



see a decrease in the return-to-risk ratio. Table 5.29 also shows that as the risk

reduced, returns also reduced as the allocation of the Islamic M-REIT sector

increased.

Table 5.29: Scenario 9: Islamic M-REIT vs KLSE Finance Sector Performance:


IslamicM-REIT

(%)

ConventionalM-REIT

(%)

KLCI(%)

KLSEPRP(%)

KLSEPLN(%)

KLSEFIN(%)

Risk(%)

Return(%)

Return-to-riskRatio

0 17.5 17.5 17.5 17.5 30 20.93 1.73 0.08

5 17.5 17.5 17.5 17.5 25 20.16 1.61 0.08

10 17.5 17.5 17.5 17.5 20 19.42 1.49 0.08

15 17.5 17.5 17.5 17.5 15 18.72 1.37 0.07

20 17.5 17.5 17.5 17.5 10 18.08 1.25 0.07

25 17.5 17.5 17.5 17.5 5 17.48 1.14 0.06

30 17.5 17.5 17.5 17.5 0 16.95 1.02 0.06

In comparing all scenarios from Tables 5.25, 5.26, 6.27, 5.28 and 5.29, the addition of

the Islamic M-REIT sector to the financial assets portfolio has resulted in increased

risk-adjusted portfolio performance when comparing it against the KLCI and KLSE

property. The increase in the Islamic M-REIT sector sees portfolio risk reduced with

higher portfolio return when comparing it against the KLSE property. The Islamic M-

REIT sector is considered a value-added component throughout the period of pre- and

post-global financial crisis to a mixed-asset portfolio as it delivers significant

portfolio diversification benefits which attract individual investors who are risk

averse.

138

5.8.3 Importance of Global Financial Crisis on Overall M-REITs and Islamic

M-REITs

This section examines the impact of the global financial crisis on the role of M-REITs

and Islamic M-REITs in a portfolio.

5.8.3.1 Overall M-REITs


period from 8 August 2005 to 27 August 2007, with the focus on examining the

performance of overall M-REITs and the KLCI in a portfolio. The allocations to

financial assets are set with varying allocations to the overall M-REIT sector and

other KLSE sub-indices. For comparison, to analyse the value-added contribution of

the overall M-REIT sector against the KLCI during the period of the pre-global

financial crisis, other sectors will be given the same equal weight. This is labelled as

scenario 10. This process will also be applied to other scenarios when the overall M-

REIT sector is analysed against other sectors. This is important to see the contribution

of the target sectors clearly, and importantly to compare between scenarios. From

Table 5.30, it is apparent that as the KLCI allocations decreased at the expense of a

proportional increase in the overall M-REIT allocation and other KLSE sub-indices

capped accordingly, portfolio performance improved. The return-to-risk ratios

increased from 1.68 to 1.76 as the allocations to the overall M-REIT sector are raised

from zero to 30%. Since having the right asset mix will help to determine the

performance of the overall M-REIT sector in this case, the increase in allocations of

the overall M-REIT sector and decrease in allocations of the KLCI in the mixed-asset

portfolio will see a positive increase in the return-to-risk ratio. Table 5.30 also shows

that as the risk is reduced, returns decreased as the allocation of the overall M-REIT

sector increased.

139

Table 5.30: Scenario 10: Overall M-REIT vs KLCI Pre-Global Financial Crisis

Performance: 8 August 2005 – 27 August 2007

OverallM-REIT

(%)

KLCI(%)

KLSEPRP(%)

KLSEPLN(%)

KLSEFIN(%)

Risk(%)

Return(%)


0.00 30.00 23.33 23.33 23.33 18.72 31.39 1.68

5.00 25.00 23.33 23.33 23.33 18.35 31.11 1.70

10.00 20.00 23.33 23.33 23.33 18.01 30.84 1.71

15.00 15.00 23.33 23.33 23.33 17.69 30.56 1.73

20.00 10.00 23.33 23.33 23.33 17.40 30.29 1.74

25.00 5.00 23.33 23.33 23.33 17.13 30.01 1.75

30.00 0.00 23.33 23.33 23.33 16.88 29.74 1.76


the period from 8 August 2005 to 27 August 2007, with the focus on examining the

performance of the overall M-REIT sector and the KLSE property sector in a




against the KLSE property sector during the period of the pre-global financial crisis,


property sector allocations decreased at the expense of a proportional increase in M-


performance improved. The return-to-risk ratios increased from 1.68 to 1.76 as the

allocations to the overall M-REIT sector are raised from zero to 30%. Since having

the right asset mix will help to determine the performance of the overall M-REIT

sector in this case, the increase in allocations of the overall M-REIT sector and



is reduced, returns decreased as the allocation of the overall M-REIT sector increased.

140

Table 5.31: Scenario 11: Overall M-REIT vs KLSE Property Sector Pre-Global

Financial Crisis Performance: 8 August 2005 – 27 August 2007

OverallM-REIT

(%)

KLCI(%)

KLSEPRP(%)

KLSEPLN(%)

KLSEFIN(%)

Risk(%)

Return(%)


0.00 23.33 30.00 23.33 23.33 19.40 32.50 1.68

5.00 23.33 25.00 23.33 23.33 18.52 31.39 1.69

10.00 23.33 20.00 23.33 23.33 17.67 30.28 1.71

15.00 23.33 15.00 23.33 23.33 16.86 29.17 1.73

20.00 23.33 10.00 23.33 23.33 16.08 28.06 1.74

25.00 23.33 5.00 23.33 23.33 15.35 26.95 1.76

30.00 23.33 0.00 23.33 23.33 14.67 25.83 1.76



performance of the overall M-REIT sector and the KLSE plantation sector in a




against the KLSE plantation sector during the period of pre-global financial crisis,


plantation allocations decreased at the expense of a proportional increase in the

overall M-REIT allocation and other KLSE sub-indices capped accordingly, portfolio

performance decreased significantly. The return-to-risk ratios decreased from 1.75 to

1.41 as the allocations to the overall M-REIT sector are raised from zero to 30%.

Since having the right asset mix will help to determine the performance of the overall

M-REIT sector in this case, the increase in allocations of the overall M-REIT sector

and decrease in allocations of the KLSE plantation sector in the mixed-asset portfolio

will see a decrease in return-to-risk ratio, reflecting the superior risk-adjusted added

value of the KLSE plantation sector compared to the overall M-REIT sector. Table

5.32 also shows that while the risk is reduced, returns reduced significantly as the

allocation of the overall M-REIT sector increased.

141

Table 5.32: Scenario 12: Overall M-REIT vs KLSE Plantation Sector Pre-Global


OverallM-REIT

(%)

KLCI(%)

KLSEPRP(%)

KLSEPLN(%)

KLSEFIN(%)

Risk(%)

Return(%)


0.00 23.33 23.33 30.00 23.33 19.06 33.44 1.75

5.00 23.33 23.33 25.00 23.33 18.44 31.63 1.72

10.00 23.33 23.33 20.00 23.33 17.85 29.81 1.67

15.00 23.33 23.33 15.00 23.33 17.32 28.00 1.62

20.00 23.33 23.33 10.00 23.33 16.83 26.19 1.56

25.00 23.33 23.33 5.00 23.33 16.40 24.38 1.49

30.00 23.33 23.33 0.00 23.33 16.03 22.57 1.41



performance of the overall M-REIT sector and the KLSE finance sector in a portfolio.


allocations to the overall M-REIT sector and other KLSE sub-indices. For comparison

to analyse the value-added contribution of the overall M-REIT sector against the

KLSE finance sector during the period of pre-global financial crisis, other sectors will

be given the same equal weight. It is apparent that as the KLSE finance sector

allocations decrease at the expense of a proportional increase in the overall M-REIT

sector allocation and other KLSE sub-indices capped accordingly, portfolio

performance improved. The return-to-risk ratios increase from 1.67 to 1.76 as the

allocations of the overall M-REIT sector are raised from zero to 30%. Since having





is reduced, returns also decreased as the allocation of the overall M-REIT sector

increased.

142

Table 5.33: Scenario 13: Overall M-REIT vs KLSE Finance Sector Pre-Global


OverallM-REIT

(%)

KLCI(%)

KLSEPRP(%)

KLSEPLN(%)

KLSEFIN(%)

Risk(%)

Return(%)


0.00 23.33 23.33 23.33 30.00 18.79 31.47 1.67

5.00 23.33 23.33 23.33 25.00 18.37 31.13 1.69

10.00 23.33 23.33 23.33 20.00 17.98 30.80 1.71

15.00 23.33 23.33 23.33 15.00 17.61 30.46 1.73

20.00 23.33 23.33 23.33 10.00 17.28 30.13 1.74

25.00 23.33 23.33 23.33 5.00 16.98 29.80 1.75

30.00 23.33 23.33 23.33 0.00 16.71 29.46 1.76


period from 3 September 2007 – 29 December 2008, with the focus on examining the

performance of overall M-REITs and the KLCI in a portfolio. The allocations to

financial assets are set with varying allocations to the overall M-REIT sector and

other KLSE sub-indices. For comparison, to analyse the value-added contribution of

the overall M-REIT sector against the KLCI during the period of post-global financial

crisis, other sectors will be given the same equal weight. This is labelled as scenario

14. This process will also be applied to other scenarios when the overall M-REIT

sector is analysed against other sectors. This is important to see the contribution of the

target sectors clearly, and importantly to compare between scenarios. From Table

5.34, it is apparent that as the KLCI allocations decreased at the expense of a

proportional increase in the overall M-REIT allocation and other KLSE sub-indices

capped accordingly, portfolio performance improved. Risk decreased and return

increased as the allocations to the overall M-REIT sector are raised from zero to 30%.

Since having the right asset mix will help to determine the performance of the overall

M-REIT sector in this case, the increase in allocations of the overall M-REIT sector

and decrease in allocations of the KLCI in the mixed-asset portfolio have improved

the portfolio performance. Table 5.34 shows that as the risk is reduced, returns

increased as the allocation of the overall M-REIT sector increased.

143

Table 5.34: Scenario 14: Overall M-REIT vs KLCI Post-Global

Financial Crisis Performance: 3 September 2007 – 29 December 2008

OverallM-REIT

(%)

KLCI(%)

KLSEPRP(%)

KLSEPLN(%)

KLSEFIN(%)

Risk(%)

Return(%)


0.00 30.00 23.33 23.33 23.33 23.40 -25.41 -1.09

5.00 25.00 23.33 23.33 23.33 22.65 -25.00 -1.10

10.00 20.00 23.33 23.33 23.33 21.91 -24.60 -1.12

15.00 15.00 23.33 23.33 23.33 21.18 -24.19 -1.14

20.00 10.00 23.33 23.33 23.33 20.46 -23.78 -1.16

25.00 5.00 23.33 23.33 23.33 19.76 -23.38 -1.18

30.00 0.00 23.33 23.33 23.33 19.06 -22.97 -1.21


the period from 3 September 2007 – 29 December 2008, with the focus on examining

the performance of the overall M-REIT sector and the KLSE property sector in a




against the KLSE property sector during the period of post-global financial crisis,


property sector allocations decreased at the expense of a proportional increase in M-


performance improved. The return-to-risk ratios increased from -1.14 to -0.97 as the





see an increase in return-to-risk ratio. Table 5.35 also shows that as the risk is

reduced, returns increased as the allocation of the overall M-REIT sector increased.

144

Table 5.35: Scenario 15: Overall M-REIT vs KLSE Property Post-Global


OverallM-REIT

(%)

KLCI(%)

KLSEPRP(%)

KLSEPLN(%)

KLSEFIN(%)

Risk(%)

Return(%)


0.00 23.33 30.00 23.33 23.33 23.36 -26.63 -1.14

5.00 23.33 25.00 23.33 23.33 22.64 -25.31 -1.12

10.00 23.33 20.00 23.33 23.33 21.94 -23.99 -1.09

15.00 23.33 15.00 23.33 23.33 21.25 -22.66 -1.07

20.00 23.33 10.00 23.33 23.33 20.57 -21.34 -1.04

25.00 23.33 5.00 23.33 23.33 19.92 -20.02 -1.01

30.00 23.33 0.00 23.33 23.33 19.29 -18.70 -0.97



the performance of the overall M-REIT sector and the KLSE plantation sector in a




against the KLSE plantation sector during the period of post-global financial crisis,


plantation allocations decreased at the expense of a proportional increase in the

overall M-REIT allocation and other KLSE sub-indices capped accordingly, portfolio

performance improves significantly. Risk reduced and return increased as the





see an increase in portfolio performance, reflecting the superior added value of the

overall M-REIT sector compared to the KLSE plantation sector. Table 5.36 shows

that while the risk is reduced, returns increased as the allocation of the overall M-

REIT sector increased.

145

Table 5.36: Scenario 16: Overall M-REIT vs KLSE Plantation Post-Global


OverallM-REIT

(%)

KLCI(%)

KLSEPRP(%)

KLSEPLN(%)

KLSEFIN(%)

Risk(%)

Return(%)


0.00 23.33 23.33 30.00 23.33 24.40 -25.20 -1.03

5.00 23.33 23.33 25.00 23.33 22.90 -24.95 -1.09

10.00 23.33 23.33 20.00 23.33 21.44 -24.70 -1.15

15.00 23.33 23.33 15.00 23.33 20.03 -24.45 -1.22

20.00 23.33 23.33 10.00 23.33 18.69 -24.20 -1.30

25.00 23.33 23.33 5.00 23.33 17.42 -23.95 -1.37

30.00 23.33 23.33 0.00 23.33 16.26 -23.70 -1.46



the performance of the overall M-REIT sector and the KLSE finance sector in a



For comparison to analyse the value-added contribution of the overall M-REIT sector

against the KLSE finance sector during the period of post-global financial crisis, other

sectors will be given the same equal weight. It is apparent that as the KLSE finance

sector allocations decreased at the expense of a proportional increase in the overall M-

REIT sector allocation and other KLSE sub-indices capped accordingly, portfolio

performance improved. Risk reduced and return increased as allocations of the

overall M-REIT sector are raised from zero to 30%. Since having the right asset mix

will help to determine the performance of the overall M-REIT sector in this case, the

increase in allocations of the overall M-REIT sector and decrease in allocations of the

KLSE finance sector in the mixed-asset portfolio will see an increase in portfolio

performance. Table 5.37 shows that as the risk is reduced, return reduced as the

allocation of the overall M-REIT sector increased.

146

Table 5.37: Scenario 17: Overall M-REIT vs KLSE Finance Post-Global


OverallM-REIT

(%)

KLCI(%)

KLSEPRP(%)

KLSEPLN(%)

KLSEFIN(%)

Risk(%)

Return(%)


0.00 23.33 23.33 23.33 30.00 23.37 -25.35 -1.08

5.00 23.33 23.33 23.33 25.00 22.64 -24.99 -1.10

10.00 23.33 23.33 23.33 20.00 21.93 -24.62 -1.12

15.00 23.33 23.33 23.33 15.00 21.24 -24.26 -1.14

20.00 23.33 23.33 23.33 10.00 20.56 -23.90 -1.16

25.00 23.33 23.33 23.33 5.00 19.91 -23.53 -1.18

30.00 23.33 23.33 23.33 0.00 19.28 -23.17 -1.20

In comparing all scenarios between the pre- and the post-global financial crisis, the

addition of the overall M-REIT sector to the financial assets portfolio has resulted in

increased risk-adjusted portfolio performance in most cases. The increase in the

overall M-REIT sector sees an increase in portfolio performance with portfolio risk

reduced except when comparing it against the KLSE plantation sector. The overall M-

REIT sector is considered a value-added component throughout the period of pre- and

post-global financial crisis to a mixed-asset portfolio as it delivers significant

portfolio diversification benefits which attract individual investors who are risk

averse.

147

5.8.3.2 Islamic M-REITs


the period from 21 August 2006 – 27 August 2007, with the focus on examining the

performance of Islamic M-REITs and conventional M-REITs in a portfolio. This is




REIT during the period of pre-global financial crisis, other sectors will be given the

same equal weight. This process will also be applied to other scenarios when the

Islamic M-REIT sector is analysed against other sectors. This is important to see the

contribution of the target sectors clearly and importantly to compare between

scenarios. From Table 5.38, it is apparent that as the conventional M-REIT allocations

decreased at the expense of a proportional increase in Islamic M-REIT allocation and

other KLSE sub-indices capped accordingly, portfolio performance decreased. The

return-to-risk ratios decreased from 2.36 to 2.10 as the allocations of the Islamic M-

REIT sector are raised from zero to 30%. Since having the right asset mix will help to

determine the performance of M-REITs in this case, the increased allocations of the

Islamic M-REIT sector and decreased allocations of the conventional M-REIT sector

in the mixed-asset portfolio will see a decrease in return-to-risk ratio. Table 5.38 also

shows that as the risk reduced, returns also reduced significantly as the allocation of

the Islamic M-REIT sector increased, resulting in a reduction in risk-adjusted

performance.

148

Table 5.38: Scenario 18: Islamic M-REIT vs Conventional M-REIT Pre-Global


IslamicM-REIT

(%)

ConventionalM-REIT

(%)

KLCI(%)

KLSEPRP(%)

KLSEPLN(%)

KLSEFIN(%)

Risk(%)

Return(%)

Return-to-riskRatio

0 30 17.5 17.5 17.5 17.5 20.25 47.88 2.36

5 25 17.5 17.5 17.5 17.5 19.98 46.59 2.33

10 20 17.5 17.5 17.5 17.5 19.75 45.31 2.29

15 15 17.5 17.5 17.5 17.5 19.54 44.03 2.25

20 10 17.5 17.5 17.5 17.5 19.37 42.74 2.21

25 5 17.5 17.5 17.5 17.5 19.22 41.46 2.16

30 0 17.5 17.5 17.5 17.5 19.11 40.17 2.10



performance of the Islamic M-REIT sector and the KLCI in a portfolio. This is



value-added contribution of the Islamic M-REIT sector against the KLCI during the

period of pre-global financial crisis, other sectors will be given the same equal weight.

It is apparent that as the KLCI allocations decreased at the expense of a proportional

increase in Islamic M-REIT allocation and other KLSE sub-indices capped

accordingly, portfolio performance decreased. The return-to-risk ratios decreased

from 2.29 to 2.20 as the allocations of the Islamic M-REIT sector are raised from zero

to 30%. Since having the right asset mix will help to determine the performance of the

Islamic M-REIT sector in this case, the increase in allocations of the Islamic M-REIT

sector and decrease in allocations of the KLCI in the mixed-asset portfolio will see a

decrease in return-to-risk ratio. Table 5.39 also shows that as the risk reduced, returns

also reduced as the allocation of the Islamic M-REIT sector increased.

149

Table 5.39: Scenario 19: Islamic M-REIT vs KLCI Pre-Global


IslamicM-REIT

(%)

ConventionalM-REIT

(%)

KLCI(%)

KLSEPRP(%)

KLSEPLN(%)

KLSEFIN(%)

Risk(%)

Return(%)

Return-to-riskRatio

0 17.5 30 17.5 17.5 17.5 21.22 48.69 2.29

5 17.5 25 17.5 17.5 17.5 20.57 47.08 2.29

10 17.5 20 17.5 17.5 17.5 19.94 45.47 2.28

15 17.5 15 17.5 17.5 17.5 19.35 43.86 2.27

20 17.5 10 17.5 17.5 17.5 18.79 42.26 2.25

25 17.5 5 17.5 17.5 17.5 18.26 40.65 2.23

30 17.5 0 17.5 17.5 17.5 17.78 39.04 2.20



performance of the Islamic M-REIT sector and the KLSE property sector in a




property sector during the period of pre-global financial crisis, other sectors will be

given the same equal weight. It is apparent that as the KLSE property sector

allocations decreased at the expense of a proportional increase in Islamic M-REIT

allocation and other KLSE sub-indices capped accordingly, portfolio performance

decreased. The return-to-risk ratios decreased from 2.38 to 1.98 as the allocations of

the Islamic M-REIT sector are raised from zero to 30%. Since having the right asset

mix will help to determine the performance of the Islamic M-REIT sector in this case,

the increase in allocations of the Islamic M-REIT sector and decrease in allocations of

the KLSE property sector in the mixed-asset portfolio will see a decrease in return-to-

risk ratio. Table 5.40 also shows that as the risk reduced, returns also reduced as the

allocation of the Islamic M-REIT sector increased.

150

Table 5.40: Scenario 20: Islamic M-REIT vs KLSE Property Sector Pre-Global


IslamicM-REIT

(%)

ConventionalM-REIT

(%)

KLCI(%)

KLSEPRP(%)

KLSEPLN(%)

KLSEFIN(%)

Risk(%)

Return(%)

Return-to-riskRatio

0 17.5 17.5 30 17.5 17.5 23.02 54.76 2.38

5 17.5 17.5 25 17.5 17.5 21.64 50.72 2.34

10 17.5 17.5 20 17.5 17.5 20.30 46.69 2.30

15 17.5 17.5 15 17.5 17.5 19.00 42.65 2.25

20 17.5 17.5 10 17.5 17.5 17.74 38.62 2.18

25 17.5 17.5 5 17.5 17.5 16.54 34.58 2.09

30 17.5 17.5 0 17.5 17.5 15.41 30.55 1.98



performance of the Islamic M-REIT sector and the KLSE plantation sector in a




plantation sector during the period of pre-global financial crisis, other sectors will be

given the same equal weight. It is apparent that as the KLSE plantation sector


sector allocation and other KLSE sub-indices capped accordingly, portfolio






see a decrease in return-to-risk ratio. Table 5.41 also shows that as the risk reduced,

returns also reduced as the allocation of the Islamic M-REIT sector increased.

151

Table 5.41: Scenario 21: Islamic M-REIT vs KLSE Plantation Sector Pre-Global


IslamicM-REIT

(%)

ConventionalM-REIT

(%)

KLCI(%)

KLSEPRP(%)

KLSEPLN(%)

KLSEFIN(%)

Risk(%)

Return(%)

Return-to-riskRatio

0 17.5 17.5 17.5 30 17.5 21.85 50.55 2.31

5 17.5 17.5 17.5 25 17.5 20.93 48.20 2.30

10 17.5 17.5 17.5 20 17.5 20.06 45.85 2.29

15 17.5 17.5 17.5 15 17.5 19.24 43.49 2.26

20 17.5 17.5 17.5 10 17.5 18.46 41.14 2.23

25 17.5 17.5 17.5 5 17.5 17.75 38.78 2.18

30 17.5 17.5 17.5 0 17.5 17.11 36.43 2.13



performance of the Islamic M-REIT sector and the KLSE finance sector in a portfolio.



value-added contribution of the Islamic M-REIT sector against the KLSE finance

sector during the period of pre-global financial crisis, other sectors will be given the

same equal weight. It is apparent that as the KLSE finance sector allocations


other KLSE sub-indices capped accordingly, portfolio performance decreased. The

return-to-risk ratios decreased from 2.29 to 2.19 as the allocations of the Islamic M-


determine the performance of the Islamic M-REIT sector in this case, the increase in

allocations of the Islamic M-REIT sector and decrease in allocations of the KLSE

finance sector in the mixed-asset portfolio will see a decrease in return-to-risk ratio.

Table 5.42 also shows that as the risk reduced, returns also reduced as the allocation

of the Islamic M-REIT sector increased.

152

Table 5.42: Scenario 22: Islamic M-REIT vs KLSE Finance Sector Pre-Global


IslamicM-REIT

(%)

ConventionalM-REIT

(%)

KLCI(%)

KLSEPRP(%)

KLSEPLN(%)

KLSEFIN(%)

Risk(%)

Return(%)

Return-to-riskRatio

0 17.5 17.5 17.5 17.5 30 21.47 49.17 2.29

5 17.5 17.5 17.5 17.5 25 20.71 47.37 2.29

10 17.5 17.5 17.5 17.5 20 19.99 45.57 2.28

15 17.5 17.5 17.5 17.5 15 19.30 43.77 2.27

20 17.5 17.5 17.5 17.5 10 18.65 41.97 2.25

25 17.5 17.5 17.5 17.5 5 18.04 40.17 2.23

30 17.5 17.5 17.5 17.5 0 17.48 38.37 2.19



the performance of Islamic M-REITs and conventional M-REITs in a portfolio. This

is labelled as scenario 23. The allocations to financial assets are set with varying



REIT during the period of post-global financial crisis, other sectors will be given the

same equal weight. This process will also be applied to other scenarios when the

Islamic M-REIT sector is analysed against other sectors. This is important to see the

contribution of the target sectors clearly and importantly to compare between

scenarios. From Table 5.43, it is apparent that as the conventional M-REIT allocations


other KLSE sub-indices capped accordingly, portfolio performance increased. The

return-to-risk ratios increased from -1.24 to -1.08 as the allocations of the Islamic M-


determine the performance of M-REITs in this case, the increased allocations of the

Islamic M-REIT sector and decreased allocations of the conventional M-REIT sector

in the mixed-asset portfolio will see an increase in return-to-risk ratio. Table 5.43 also

shows that as the risk reduced, returns increased as the allocation of the Islamic M-

REIT sector increased, resulting in an increased risk-adjusted performance.

153

Table 5.43: Scenario 23: Islamic M-REIT vs Conventional M-REIT Post-Global


IslamicM-REIT

(%)

ConventionalM-REIT

(%)

KLCI(%)

KLSEPRP(%)

KLSEPLN(%)

KLSEFIN(%)

Risk(%)

Return(%)

Return-to-riskRatio

0 30 17.5 17.5 17.5 17.5 18.37 -22.82 -1.24

5 25 17.5 17.5 17.5 17.5 18.26 -22.27 -1.22

10 20 17.5 17.5 17.5 17.5 18.19 -21.73 -1.19

15 15 17.5 17.5 17.5 17.5 18.14 -21.18 -1.17

20 10 17.5 17.5 17.5 17.5 18.13 -20.64 -1.14

25 5 17.5 17.5 17.5 17.5 18.14 -20.09 -1.11

30 0 17.5 17.5 17.5 17.5 18.18 -19.55 -1.08



the performance of the Islamic M-REIT and the KLCI in a portfolio. This is labelled

scenario 24. The allocations to financial assets are set with varying allocations to M-

REITs and other KLSE sub-indices. For comparison to analyse the value-added

contribution of the Islamic M-REIT sector against the KLCI sector during the whole

period of post-global financial crisis, other sectors will be given the same equal

weight. It is apparent that as the KLCI allocations decreased at the expense of a

proportional increase in Islamic M-REIT allocation and other KLSE sub-indices

capped accordingly, portfolio performance improved. Risk reduced and return

increased as the allocations of the Islamic M-REIT sector are raised from zero to

30%. Since having the right asset mix will help to determine the performance of the

Islamic M-REIT sector in this case, the increase in allocations of the Islamic M-REIT

sector and decrease in allocations of the KLCI in the mixed-asset portfolio will see an

increase in portfolio performance. Table 5.44 shows that as the risk reduced, returns

increased as the allocation of the Islamic M-REIT sector increased.

154

Table 5.44: Scenario 24: Islamic M-REIT vs KLCI Post-Global


IslamicM-REIT

(%)

ConventionalM-REIT

(%)

KLCI(%)

KLSEPRP(%)

KLSEPLN(%)

KLSEFIN(%)

Risk(%)

Return(%)

Return-to-riskRatio

0 17.5 30 17.5 17.5 17.5 20.12 -23.55 -1.17

5 17.5 25 17.5 17.5 17.5 19.31 -22.71 -1.18

10 17.5 20 17.5 17.5 17.5 18.54 -21.88 -1.18

15 17.5 15 17.5 17.5 17.5 17.80 -21.04 -1.18

20 17.5 10 17.5 17.5 17.5 17.10 -20.20 -1.18

25 17.5 5 17.5 17.5 17.5 16.45 -19.36 -1.18

30 17.5 0 17.5 17.5 17.5 15.84 -18.52 -1.17


the period from 3 September 2007 to 29 December 2008, with the focus on examining

the performance of the Islamic M-REIT sector and the KLSE property sector in a




property sector during the period of post-global financial crisis, other sectors will be

given the same equal weight. It is apparent that as the KLSE property sector



improved significantly. The return-to-risk ratios increased from -1.29 to -0.96 as the




decrease in allocations of the KLSE property in the mixed-asset portfolio will see an

increase in return-to-risk ratio. Table 5.45 also shows that as the risk reduced, returns

increased as the allocation of the Islamic M-REIT sector increased.

155

Table 5.45: Scenario 25: Islamic M-REIT vs KLSE Property Post-Global


IslamicM-REIT

(%)

ConventionalM-REIT

(%)

KLCI(%)

KLSEPRP(%)

KLSEPLN(%)

KLSEFIN(%)

Risk(%)

Return(%)

Return-to-riskRatio

0 17.5 17.5 30 17.5 17.5 20.08 -25.84 -1.29

5 17.5 17.5 25 17.5 17.5 19.28 -24.09 -1.25

10 17.5 17.5 20 17.5 17.5 18.53 -22.33 -1.21

15 17.5 17.5 15 17.5 17.5 17.81 -20.58 -1.16

20 17.5 17.5 10 17.5 17.5 17.15 -18.83 -1.10

25 17.5 17.5 5 17.5 17.5 16.53 -17.07 -1.03

30 17.5 17.5 0 17.5 17.5 15.98 -15.32 -0.96



the performance of the Islamic M-REIT sector and the KLSE plantation sector in a




plantation sector during the period of post-global financial crisis, other sectors will be

given the same equal weight. It is apparent that as the KLSE plantation sector



improved. Risk reduced and return increased as the allocations of the Islamic M-REIT

sector are raised from zero to 30%. Since having the right asset mix will help to



plantation sector in the mixed-asset portfolio will see an increase in portfolio

performance. Table 5.46 also shows that as the risk reduced, returns increased as the


156

Table 5.46: Scenario 26: Islamic M-REIT vs KLSE Plantation Post-Global


IslamicM-REIT

(%)

ConventionalM-REIT

(%)

KLCI(%)

KLSEPRP(%)

KLSEPLN(%)

KLSEFIN(%)

Risk(%)

Return(%)

Return-to-riskRatio

0 17.5 17.5 17.5 30 17.5 22.00 -23.16 -1.05

5 17.5 17.5 17.5 25 17.5 20.43 -22.48 -1.10

10 17.5 17.5 17.5 20 17.5 18.91 -21.80 -1.15

15 17.5 17.5 17.5 15 17.5 17.44 -21.12 -1.21

20 17.5 17.5 17.5 10 17.5 16.03 -20.43 -1.27

25 17.5 17.5 17.5 5 17.5 14.72 -19.75 -1.34

30 17.5 17.5 17.5 0 17.5 13.52 -19.07 -1.41



the performance of the Islamic M-REIT sector and the KLSE finance sector in a




finance sector during the whole period of post-global financial crisis, other sectors

will be given the same equal weight. It is apparent that as the KLSE finance sector



improved. Risk reduced and return increased as the allocations of the Islamic M-REIT

sector are raised from zero to 30%. Since having the right asset mix will help to



finance sector in the mixed-asset portfolio will see an increase in portfolio

performance. Table 5.47 also shows that as the risk reduced, returns increased as the


157

Table 5.47: Scenario 27: Islamic M-REIT vs KLSE Finance Post-Global


IslamicM-REIT

(%)

ConventionalM-REIT

(%)

KLCI(%)

KLSEPRP(%)

KLSEPLN(%)

KLSEFIN(%)

Risk(%)

Return(%)

Return-to-riskRatio

0 17.5 17.5 17.5 17.5 30 20.10 -23.44 -1.17

5 17.5 17.5 17.5 17.5 25 19.29 -22.65 -1.17

10 17.5 17.5 17.5 17.5 20 18.53 -21.85 -1.18

15 17.5 17.5 17.5 17.5 15 17.81 -21.06 -1.18

20 17.5 17.5 17.5 17.5 10 17.15 -20.26 -1.18

25 17.5 17.5 17.5 17.5 5 16.56 -19.47 -1.18

30 17.5 17.5 17.5 17.5 0 16.03 -18.67 -1.16

In comparing all scenarios between the pre- and the post-global financial crisis, the

addition of the Islamic M-REIT sector to the financial assets portfolio has resulted in

decreased portfolio performance during the pre-global financial crisis and increased

portfolio performance during the post-global financial crisis. During the period of pre-

global financial crisis, the increase in the Islamic M-REIT sector sees portfolio risk

reduced with lower portfolio return. The Islamic M-REIT sector is considered a

value-added component throughout the period of pre- and post-global financial crisis

to a mixed-asset portfolio as it delivers significant portfolio diversification benefits

which attract individual investors who are risk averse.

In addition to the reported correlation coefficients and reporting conducted scenarios,

the next section plots the efficient frontier and optimal asset composition to highlight

the role of M-REITs and Islamic M-REITs in portfolio construction and risk

management.

158

5.9 Efficient frontiers and Asset Allocation Diagrams

Efficient frontiers of mixed-asset portfolios have been constructed to evaluate the

diversification benefits of conventional M-REITs and Islamic M-REITs in a mixed-

asset portfolio. In order to estimate the diversification benefits of conventional M-

REITs and Islamic M-REITs in a mixed asset portfolio, efficient portfolios and

optimal asset allocations are constructed applying data generated from Solver using

the risk, returns and correlation data calculated from DataStream over August 2005

till December 2008.

Figure 5.7 presents the efficient frontier of a mixed asset portfolio consisting of

Islamic M-REITs, conventional M-REITs and stocks for the period of August 2006 –

December 2008. When M-REIT sectors are added to the portfolio, the addition of

another asset class to the mixed-asset portfolio has resulted in significant

diversification improvement. Overall, M-REIT sectors have a significant allocation at

all risk-return levels.

Figure 5.7: M-REIT Efficient Frontier: August 2006 – December 2008

159

Figure 5.8 presents the asset allocation diagram of a mixed asset portfolio consisting

Islamic M-REITs, conventional M-REITs and stocks for the period of August 2006 –

December 2008. Due to relatively poor performance of the overall stock market

during the global financial crisis period with reduced return and increasing risk by

KLCI, conventional M-REITs dominated the upper risk region of the portfolio and are

substituted by Islamic M-REIT when moving down the portfolio risk spectrum. It is

apparent that as the Islamic M-REIT allocations increased at the expense of

reductions in conventional M-REITs, portfolio risk reduced significantly. Overall, M-

REIT sectors have a significant allocation at all risk levels, with the portfolio risk

decreases as the allocation of Islamic M-REITs increasing.

M-REITs have a significant allocation at all risk levels, where the portfolio risk

decreases as the allocation of Islamic M-REITs increases. The addition of another

asset class particularly Islamic M-REITs to the mixed-assets portfolio has resulted in

significant diversification improvement. When the Islamic M-REIT sector is

increasingly added to the portfolio, the portfolio risk has declined. The risk decreases

from 12.5% to 10.7% as the allocations to Islamic M-REITs are raised from 0% to

40%. Since having the right asset mix will help to determine the performance of M-

REITs, in this case, zero allocations of the KLCI, KLSE plantation, KLSE property

and KLSE finance in the mixed- asset portfolio will ensure a positive risk-return ratio.

160

Figure 5.8: M-REIT Asset Allocation Diagram: August 2006 – December 2008

5.9.1 Impact of Global Financial Crisis


Islamic M-REITs, conventional M-REITs and stocks for the period of pre-GFC

(August 2006 – December 2008). As demonstrated, at all levels of the risk-return

spectrum, the inclusion of M-REITs significantly adds diversification benefits to the

mixed-asset portfolio. Overall, M-REITs have a significant allocation in the mixed

asset portfolio.

161

Figure 5.9: M-REIT Efficient Frontier: pre-GFC

The overall risk adjusted performance improves significantly as Malaysian stocks

performed strongly in the pre-GFC period. This can be seen as the full risk spectrum

is dominated by KLCI. Overall portfolio risk is reduced even more with the addition

of conventional M-REITs at the higher and lower risk spectrum. At the lowest level

of the risk spectrum, overall portfolio risk is reduced by 2.7% through the addition of

Islamic M-REITs (see Figure 5.10).

The findings also show that when the level of Islamic M-REITs is increased in the

mixed-asset portfolio, portfolio risk reduced substantially. On the whole, the findings

suggest that the addition of M-REITs and Islamic REITs in the Malaysian mixed-asset

portfolio has resulted in significant diversification gains. The diversification benefit

is even more significant when Islamic M-REITs are included in the mixed-asset

portfolio. The inclusion of Islamic M-REITs in a portfolio still outperformed the

other assets and gives a great addition in a mixed-asset portfolio. During pre-GFC, M-

REITs have a significant allocation at all risk levels, with the allocation increasing as

the portfolio risk decreases.

162

Although the number of M-REITs are currently small and is expected to increase

significantly in the near future, M-REITs have demonstrated their importance in the

mixed-asset portfolio, with most significant contributions to diversification benefits at

the lower portfolio risk level with significant risk reduction.

Allocations to Islamic M-REITs increased, with the maximum risk reduction recorded

at the 55% allocation level. When the allocation to Islamic M-REITs increased in the

mixed-asset portfolio, portfolio risk reduced substantially. The mixed-asset portfolio

analyses have seen significant portfolio performance improvement as allocations for

M-REITs, particularly Islamic M-REITs, increased at the expense of a reduction in

KLCI allocations. Overall, the risk of the portfolio has reduced significantly from

19.7% to 12.3%.

Figure 5.10: M-REIT Asset Allocation Diagram: pre-GFC

163


Islamic M-REITs, conventional M-REITs and stocks for the GFC period of August

2006 – December 2008. The efficient frontier of combining M-REITs is found to be

more efficient and dominates the mixed-asset portfolio at all levels of the risk-return

spectrum. Overall, M-REITs have a significant allocation at all risk-return levels.

Figure 5.11: M-REIT Efficient Frontier: GFC

Figure 5.12 depicts the allocation of M-REIT sectors in the efficient portfolio across

various risk levels from August 2005 to December 2008. The allocation to M-REITs

is more significant than Figure 5.11. The allocation to conventional M-REITs is

reduced dramatically at higher portfolio risk levels. At the highest portfolio risk

levels, the portfolio is dominated by Islamic M-REITs.

164

The mixed M-REIT portfolio reduced the portfolio’s risk from 13.4% to 8.4%. Due

to relatively poor performance during the global financial crisis period, KLCI had no

allocation in this optimal portfolio. The mixed-asset portfolio analyses have seen

significant risk reduction improvement as allocations for conventional M-REIT are

increased at the expense of a reduction in Islamic M-REIT. In this GFC period, the

allocation to Islamic M-REITs had increased from 30% to 100%, indicating the trend

of increased holding of Islamic M-REITs by off loading conventional M-REITs. At

the higher end of the portfolio risk levels, the efficient portfolio is totally dominated

by Islamic M-REIT. The outperformance of M-REITs is clear when compared to

other assets. M-REITs stood out as the best performing asset class during the GFC,

even with reduced return. The diversification gain by adding Islamic M-REITs to the

mixed-assets portfolio is not as significant as compared to the pre-GFC period.

However, M-REITs still dominate the mixed-asset portfolio.

Figure 5.12: M-REIT Asset Allocation Diagram: GFC

165

Although results vary, the results clearly demonstrate the importance of M-REITs in

achieving an efficient portfolio and the significant contribution of M-REITs in a

mixed-asset portfolio in gaining diversification benefits. The most noticeable

improvement is the addition of Islamic M-REITs to a mixed-asset portfolio during the

GFC period, reflecting the defensive characteristic of Shariah-compliant products.

The best performance is achieved by adding M-REITs and Islamic M-REITs in a

mixed-asset portfolio. However, one should be cautious before concluding that KLCI

has no place in the efficient portfolio of the GFC, as the two-asset (conventional and

Islamic M-REITs) portfolio outperformed all other portfolio mixes. Factors such as

small sample bias as well as short study period (2½ years) should be taken into

consideration. A more rigourous study is important to see the performance of Islamic

M-REITs in the future.

5.10 M-REIT Panel Regression

In this analysis, the regression method for modeling n data ‘panels’ is the least square

estimator of a regression model with a singular predictor variable: 2 parameters, one

independent variable (Yi = β0 + βlXi + ui). Table 5.48 shows the individual M-REITs’

financial and management strength from 2007 till 2009. Financial strength includes

Nett Tangible Asset Backing Per Share, Liquid asset Per Share, Debt to Equity Ratio

and Altman's Z-Score, while management strength includes Asset Turnover, Gross

Margin, Free Cashflow To Capital and Return on Shareholders’ Equity (ROE).

166

Table 5.48: M-REIT Financial and Management Performance from 2007- 2009

Year M-REIT NAB/Share(RM)

LiqAsset/Share

(RM)

D/ERatio

Altman'sZ-Score

RentalInc. ToProp.Assets

NettRentalMargin

FreeCashflowTo Capt

ROE

2007 AHP 1.48 0.08 0 12.67 0.09 59.86% 2.98% 12.62%

2008 AHP 1.5 0.09 0 11.62 0.1 63.74% 4.93% 5.83%

2009 AHP 1.51 0.08 0 12.92 0.1 63.70% 3.67% 4.95%

2007 Axis 1.63 0 0.63 1 0.08 81.55% -17.49% 20.50%

2008 Axis 1.75 0 0.51 0.91 0.09 84.41% -11.08% 14.17%

2009 Axis 1.79 0.05 0.3 0.88 0.08 83.71% NA 11.26%

2007 Starhill 0.97 0.07 0.16 3.5 0.08 82.60% 5.26% 6.34%

2008 Starhill 0.97 0.09 0.16 2.77 0.08 83.73% 6.05% 7.09%

2009 Starhill 1.2 0.08 0.13 2.98 0.07 82.90% 4.61% 25.06%

2007 UOA 1.39 0.01 0.19 2.41 0.08 77.02% 5.61% 29.32%

2008 UOA 1.39 0 0.33 1.4 0.09 77.64% -6.53% 7.37%

2009 UOA 1.49 0.01 0.32 1.36 0.09 78.66% 5.32% 14.34%

2007 Tower 1.45 0.06 0.33 1.81 0.07 77.69% -7.92% 26.14%

2008 Tower 1.59 0 0.26 1.89 0.08 78.30% 5.21% 14.89%

2009 Tower 1.62 0 0.25 1.81 0.08 76.47% 5.04% 7.89%

2007 KPJ 1.03 0.04 0.38 1.71 0.07 94.22% 4.12% 7.27%

2008 KPJ 1.03 0.09 0.53 1.2 0.07 94.52% -6.66% 9.93%

2009 KPJ 1.04 0.09 0.81 0.91 0.06 94.25% -15.95% 9.94%

2007 Hektar 1.17 0.06 0.49 1.27 0.11 62.91% -55.63% 17.37%

2008 Hektar 1.26 0.06 0.75 0.61 0.12 62.69% -11.84% 15.01%

2009 Hektar 1.27 0.12 0.82 0.45 0.12 60.45% 2.48% 9.14%

2007 AmFIRST 1.01 0.04 0.15 3.22 0.1 72.49% -95.07% 7.00%

2008 AmFIRST 1 0.08 0.93 0.12 0.07 70.25% -35.02% 7.34%

2009 AmFIRST 1.32 0.08 0.71 0.5 0.09 65.85% 2.70% 31.50%

2007 QCT 1.2 0.09 0.19 3.12 0.06 80.91% -34.38% 16.29%

2008 QCT 1.21 0.07 0.64 0.82 0.07 77.86% -25.53% 6.83%

2009 QCT 1.22 0.07 0.64 0.86 0.09 77.23% 3.58% 6.97%

2007 Boustead 1.01 0.04 0 9.2 0.11 97.67% -39.56% 10.43%

2008 Boustead 1.26 0.01 0.14 3.38 0.08 97.77% -6.75% 27.13%

2009 Boustead 1.31 0.02 0.13 3.45 0.09 97.81% 7.77% 11.36%

2007 Amanahraya 0.94 0.14 0.62 0.77 0.04 96.22% -96.71% 3.12%

2008 Amanahraya 1.02 0.15 0.57 0.96 0.07 96.82% 4.03% 15.24%

2009 Amanahraya 1.02 0.14 0.57 0.93 0.07 96.31% 4.38% 7.02%

2007 Atrium 0.98 0.14 0.37 1.44 0.09 93.46% -86.65% 8.91%

2008 Atrium 1.04 0.16 0.36 1.15 0.08 92.22% 6.70% 13.55%

2009 Atrium 1.04 0.17 0.36 1.07 0.08 80.41% 4.71% 6.80%Source: Dynaquest

167

According to Table 5.48, AHP has the overall highest value of Z-Score (12.40) and

the highest in yearly comparison of individual companies which indicates it is the

strongest company financially for 2007 (12.67), 2008 (11.62) and 2009 (12.92). For

the same years assessed, Axis, Hektar, Tower, KPJ, Amanahraya, Atrium had a score

below 2.00 for each year which is considered questionable while Starhill has a score

of above 2.00 for which is regarded as good. UOA, QCT, Boustead and Amfirst have

a mixed financial strength for their companies.

In terms of free cashflow to capital, Starhill is more efficient in using its capital with

an overall highest ratio of 5.31% from 2007 to 2009. In yearly comparison of

individual companies, UOA has the highest ratio of 5.61% in 2007, while Atrium has

the highest ratio in 2008 (6.70%). In 2009, Boustead has the highest ratio of 7.77% in

comparison to other companies. The overall least efficient company in using its

capital is AmFirst (-42.46%). In yearly comparison of individual companies,

Amanahraya has the lowest ratio of -96.71% in 2007, while AmFirst has the lowest

ratio in 2008 (-35.02%). In 2009, KPJ has the lowest ratio of 15.95% in comparison to

other companies.

From 2007 to 2009, KPJ is the only company with an ROE less than 10% for each

year. This probably means the company is poor in managing assets or high in

revaluing its assets or both. For the same years assessed individually, Axis REIT and

Al-Hadharah Boustead REIT have more than 10% of ROE for each year assessed

which means the management of the company is making use of the assets well in

generating return for its shareholders.

According to the Debt per Equity Ratio, the smaller the ratio, the stronger is the

company. From 2007 to 2009, AHP is financially the strongest company overall and

for each year assessed. The least strong company overall is Hektar (0.69) and has the

highest ratio of 0.82 in 2009. In comparing individual companies yearly, Axis (0.63)

and AmFirst (0.93) are the least strong company in 2007 and 2008 respectively.

To determine the high financial strength of a company according to Liquid Asset per

Share, Atrium is financially the strongest company overall and for each year assessed

in 2007 (0.14), 2008 (0.16) and 2009 (0.17). The overall least strong company

financially is UOA (0.01). In comparing individual companies yearly, Axis and

168

Tower is the least strong company financially in 2007 and 2009 respectively. Both

companies together with UOA is the least strong company financially in 2008.

In potential of obtaining more profit and better quality management, Boustead has the

highest gross margin overall (97.75%) and for each year assessed in 2007 (97.67%),

2008 (97.77%) and 2009 (97.81%). While Hektar have the lowest margin of 62.02%

overall. In comparing individual companies yearly, AHP has the lowest margin of

59.86% and 63.7% in 2007 and 2009 respectively while Hektar has the lowest margin

of 62.69% in 2008.

The higher a company’s total asset turnover indicates the efficiency of its assets being

used to generate sales. Hektar has the overall highest turnover ratio of 0.12 and the

highest turnover ratio in 2008 (0.12) and 2009 (0.12). Both Hektar and Boustead have

the highest turnover ratio in 2007. Overall, Amanahraya has the lowest turnover ratio

of 0.06 and the lowest turnover ratio in 2007 (0.04). In 2008, KPJ, AmFirst and QCT

have the lowest turnover ratio of 0.07 while KPJ still has the lowest ratio of 0.06 in

2009.

When using Yi = β0 + βlXi + ui as the regression equation, dependant variable (Y), then

constant term β0 (C) and then independent variables (Xs) should be typed in EVIEWS

estimation equation dialogue box (see Figure 5.13). In this case, the independent

variable (X) is year as it influences dependent variables (i.e ROE, nett rental margin).

Dependent variables (Y) are observed which is dependent to the changing year. The

task is to find value for β0 and βl (the slope, also called the regression coefficient)

when “u” representing the error or random disturbance is not accounted for by the

equation. If values for these coefficients determined, βl describes the effect of a unit

increase in X on Y. Often a regression line is a linear approximation to an underlying

relationship and the intercept β0 only has a useful meaning if observations around X=0

occur in the data.

169

Figure 5.13: Calculation Using EVIEWS

Source: Author’s calculation

Panel Least Squares methods are used for the sample year of 2007, 2008 and 2009.

All 3 periods are included in this calculation with 12 cross-sections included and a

total panel (balanced) observations of 36. To see the significant relationship between

the independent variable X and the dependent variable Y, the slope should not equal

zero Ha: Β1 ≠ 0. The criteria to determine whether to reject or accept the null

hypothesis H0: Β1 = 0 include a significant level of 0.05 and a linear regression t-test

(if the slope of the regression line differs significantly from zero). Table 5.49 shows

the output generated from EVIEWS on the relationship between M-REITs’ ROE

which is dependent on the changing year. According to these results, the decrease in

year sees an increase in ROE. If the relationship between year and ROE is significant,

the slope will not equal zero.

170

Thus, the regression equation for Table 5.49 is,

Y=16.09 + -0.01X.

While the equation for degrees of freedom and the t-score test statistic is,

Degrees of Freedom = n-2 = 12 - 2 = 10

t-score = Β1/Standard Error = -0.007950/0.015149 = -0.52478

In describing the overall fit of the estimated model, the coefficient of determination R2

= 0.01 indicates the extent to which the dependent variable is predictable. This means

that 1 percent of the variance in Y is predictable from X (1% of the variability in ROE

can be explained by year).

Table 5.49: Dependent Variable: Return on Equity (ROE)

Variable Coefficient Std. Error t-Statistic Prob.

C 16.09024 30.41953 0.528944 0.6003YEAR -0.007950 0.015149 -0.524781 0.6031

R-squared 0.008035 Mean dependent var 0.126644Adjusted R-squared -0.021141 S.D. dependent var 0.073443S.E. of regression 0.074215 Akaike info criterion -2.309736Sum squared resid 0.187270 Schwarz criterion -2.221762Log likelihood 43.57524 Hannan-Quinn criter. -2.279031F-statistic 0.275395 Durbin-Watson stat 2.029434Prob(F-statistic) 0.603141

171

Table 5.50 shows the output generated from EVIEWS on the relationship between M-

REITs’ Gross Margin which is dependent on the changing year. According to these

results, the decrease in year sees an increase in Gross Margin. If the relationship

between year and Gross Margin is significant, the slope will not equal zero. Thus, the

regression equation for Table 5.50 is,

Y= 16.58 + -0.01X.





= 0.003 indicates the extent to which the dependent variable is predictable. This

means that 0.3% percent of the variance in Y is predictable from X (1% of the

variability in Gross Margin can be explained by year).

Table 5.50: Dependent Variable: Gross Margin


C 16.58069 49.86668 0.332500 0.7416YEAR -0.007854 0.024834 -0.316267 0.7537


172


REITs’ Nett Asset Backing per Share which is dependent on the changing year.

According to these results, the increase in year sees a decrease in Nett Asset Backing

per Share. If the relationship between year and Nett Asset Backing per Share is

significant, the slope will not equal zero. Thus, the regression equation for Table 5.51

is,

Y= -130.10+ 0.07X.



t-score = Β1/Standard Error = 0.065417/0.049713 = 1.315893227



that 5 percent of the variance in Y is predictable from X (1% of the variability in can

be explained by year).

Table 5.51: Dependent Variable: Nett Asset Backing per Share


C -130.1036 99.82400 -1.303330 0.2012YEAR 0.065417 0.049713 1.315883 0.1970

R-squared 0.048460 Mean dependent var 1.253056Adjusted R-squared 0.020473 S.D. dependent var 0.246076S.E. of regression 0.243544 Akaike info criterion 0.066912Sum squared resid 2.016660 Schwarz criterion 0.154885Log likelihood 0.795588 Hannan-Quinn criter. 0.097617F-statistic 1.731547 Durbin-Watson stat 0.130811Prob(F-statistic) 0.197017

173


REITs’ Free Cashflow to Capital which is dependent on the changing year. According

to these results, the increase in year sees a decrease in Free Cashflow to Capital. If the

relationship between year and Free Cashflow to Capital is significant, the slope will

not equal zero. Thus, the regression equation for Table 5.52 is,

Y= -371.40 + 0.18X.





= 0.282 indicates the extent to which the dependent variable is predictable. This

means that 30 percent of the variance in Y is predictable from X (1% of the variability

in can be explained by year).

Table 5.52: Dependent Variable: Free Cashflow to Capital


C -371.3996 101.6544 -3.653551 0.0009YEAR 0.184896 0.050625 3.652285 0.0009

R-squared 0.281779 Mean dependent var -0.128783Adjusted R-squared 0.260655 S.D. dependent var 0.288433S.E. of regression 0.248009 Akaike info criterion 0.103252Sum squared resid 2.091294 Schwarz criterion 0.191226Log likelihood 0.141457 Hannan-Quinn criter. 0.133957F-statistic 13.33918 Durbin-Watson stat 1.436441Prob(F-statistic) 0.000866

174


REITs’ Liquid Asser per Share which is dependent on the changing year. According

to these results, the increase in year sees a decrease in Liquid Asser per Share. If the

relationship between year and Liquid Asser per Share is significant, the slope will not

equal zero. Thus, the regression equation for Table 5.53 is,

Y= -11.64+ 0.01X.








Table 5.53: Dependent Variable: Liquid Asset per Share


C -11.64444 20.43840 -0.569734 0.5726YEAR 0.005833 0.010178 0.573104 0.5703


175


REITs’ Asset Turnover which is dependent on the changing year. According to these

results, the increase in year sees a decrease in Asset Turnover. If the relationship

between year and Asset Turnover is significant, the slope will not equal zero. Thus,

the regression equation for Table 5.54 is,

Y= -3.26+ 0.002X.








Table 5.54: Dependent Variable: Asset Turnover


C -3.263333 6.935048 -0.470557 0.6410YEAR 0.001667 0.003454 0.482573 0.6325


176


REITs’ Altman’s Z-Score which is dependent on the changing year. According to

these results, the decrease in year sees an increase in Altman’s Z-Score. If the

relationship between year and Altman’s Z-Score is significant, the slope will not


Y= 1174.03+ -0.58X.








Table 5.55: Dependent Variable: Altman’s Z-Score


C 1174.030 1384.220 0.848153 0.4023YEAR -0.583333 0.689352 -0.846205 0.4034

R-squared 0.020626 Mean dependent var 2.696389Adjusted R-squared -0.008179 S.D. dependent var 3.363396S.E. of regression 3.377123 Akaike info criterion 5.325878Sum squared resid 387.7686 Schwarz criterion 5.413851Log likelihood -93.86580 Hannan-Quinn criter.5.356583F-statistic 0.716063 Durbin-Watson stat 0.171204Prob(F-statistic) 0.403355

177


REITs’ Debt per Equity Ratio which is dependent on the changing year. According to

these results, the increase in year sees a decrease in Debt per Equity Ratio. If the

relationship between year and Debt per Equity Ratio is significant, the slope will not


Y= -127.63 + 0.06X.








Table 5.56: Dependent Variable: Debt per Equity Ratio


C -127.6286 105.1476 -1.213804 0.2332YEAR 0.063750 0.052364 1.217431 0.2318

R-squared 0.041771 Mean dependent var 0.381389Adjusted R-squared 0.013588 S.D. dependent var 0.258293S.E. of regression 0.256532 Akaike info criterion 0.170825Sum squared resid 2.237493 Schwarz criterion 0.258799Log likelihood -1.074856 Hannan-Quinn criter. 0.201530F-statistic 1.482139 Durbin-Watson stat 0.670326Prob(F-statistic) 0.231823

178

5.11 Conclusion

During the post-financial crisis, all investment vehicles generate a negative return. In

terms of portfolio diversification for the whole period, the overall M-REIT and

Islamic M-REIT sector delivered excellent portfolio diversification benefit. However,

one should be cautious before concluding that Islamic M-REITs and conventional M-

REITs have a smaller role in the mixed-asset portfolio, as KLSE plantation portfolios

outperformed all other portfolio mixes. Factors such as small sample bias as well as

short study period (2½ years) should be taken into consideration.

From the extensive analysis, a summary of the performance of the overall M-REIT

sector through the period of 8 August 2005 to 28 December 2008 can be seen in Table

5.57, while the summary of the performance of Islamic M-REITs through the period

of 21 August 2006 to 28 December 2008 can be seen in Table 5.58. The sectors will

be divided into six key investment performance criteria similar to that presented in the

EPRA performance report card for each European country or region (EPRA, 2003).

Overall, the results clearly reinforce the strong added-value and risk reduction

benefits of the conventional M-REIT and Islamic M-REIT sectors in a mixed-asset

portfolio during the periods mentioned. This will also highlight the need for including

conventional M-REITs and Islamic M-REITs in an investment portfolio.

Prior studies have seen most REIT markets (e.g. US, Australia) to significantly under-

perform their equivalent stockmarkets at significantly increased risk levels during the

GFC (Macquarie Securities, 2009; Newell & Peng, 2009). However, Islamic M-

REITs delivered the best risk-adjusted returns among all asset classes in this GFC

period and improved portfolio diversification benefits during the GFC.

179

Table 5.57: Overall M-REIT and Performance Report Card: 8 August 2005 – 28

December 2008

*N/A = difficulties interpreting negative return to risk ratio

Table 5.58: Islamic M-REIT performance report card: 21 August 2006 – 28

December 2008

*N/A = difficulties interpreting negative return to risk ratio

Sectors Superioraverageannualreturns

Lowerannual

risk

Superiorrisk

adjustedreturns

Enhancedportfolio

diversificationbenefits

Superiorrisk

adjustedportfolioreturns

Pre Post Pre Post Pre Post Pre Post Pre PostOverallM-REIT × × × N/A

KLCI × × N/A

KLSEProperty × × × × N/A

KLSEPlantation × × N/A

KLSEFinance × × × × N/A

Sectors Superioraverageannualreturns

Lowerannual

risk

Superiorrisk

adjustedreturns

Enhancedportfolio

diversificationbenefits

Superiorrisk

adjustedportfolioreturns*

Pre Post Pre Post Pre Post Pre Post Pre PostOverallM-REIT × × × N/A N/A

IslamicM-REIT × × × N/A

ConventionalM-REIT × × N/A

KLCI × × × × × × × N/A

KLSE Property × × × × N/A

KLSEPlantation × × × N/A

KLSE Finance × × × × × N/A

180

CHAPTER 6

ANALYSIS OF THE M-REIT SURVEY

6.1 Introduction

The M-REIT survey listing the potential factors affecting the development of

Malaysian REITs was conducted between October 2007 and December 2007. Three

similar questionnaires have been developed and personal interviews conducted for

three distinct groups of participants; REIT managers, fund managers and property

advisors. A copy of each survey and covering letter are attached in Appendix I, II and

III. The common questions in the questionnaire included:

31 specific factors on the ongoing success of Malaysian REITs

31 specific factors on the current performance of Malaysian REITs

Qualitative questions regarding Malaysian REITs.

A total of 150 surveys had been sent out and a total of 96 completed surveys were

returned, which consisted of local senior and experienced REIT managers (11), fund

managers (55) and property advisors (30) in Malaysia. Due to limitations on time and

location, several interviews are conducted face to face, while others were by phone

and by email. No differences in the quality of responses were seen to be evident with

these three methods, based on the conduct of these surveys. This gave an overall

response rate of 64% which is considered highly satisfactory, given the difficulties of

conducting surveys with senior executives; particularly in Asia. The percentage and

response rate within each group was also relatively high for REIT managers (85%),

fund managers (65%) and property advisors (58%). The quality of survey respondents

was also excellent, with all respondents consisting of staff in senior positions in their

organisation; this further reinforces the quality of the survey responses. The following

181

sections highlight the survey results and differences between the three groups of

participants. The identities of respondents are anonymous. The value of conducting

these surveys is to give a better view in respect of the Malaysian REIT industry.

These 3 groups are especially selected as they represent professional workers working

closely with the Malaysian REIT industry.

6.2 Importance of Factors Regarding the Current Performance of M-REITs

This will be presented starting with overall results; then for the 3 groups separately;

followed by a comparison of the 3 groups. The comparison between the 3 groups will

include rank correlation and ANOVA analyses.

6.2.1 Overall

Table 6.1 presents the average scores and respective ranks for the 31 specific issues

for the 96 survey respondents relating to the current performance of M-REITs. This is

presented for the overall respondents, as well as for the three groups of participants.

182


M-REITs

Total

(n=96)

REITManagers

(n=11)

FundManagers

(n=55)

PropertyAdvisors(n=30)

Variable Score Rank Score Rank Score Rank Score Rank

Risk profile is acceptable 3.75 1 3.91 15 3.80 1 3.60 12

Earning profile increases 3.69 2 4.27 7 3.40 3 4.00 5

Rental rate increases 3.69 2 4.36 1 3.60 2 3.60 12

Malaysian property market performing well 3.67 4 3.55 22 3.40 3 4.20 3

A secure and favourable tax transparencytreatment locally

3.59 5 4.36 1 3.00 12 4.40 1

Tax treatment is appropriate 3.58 6 4.36 1 3.20 9 4.00 5

A secure and favourable tax transparencytreatment internationally

3.53 7 3.82 17 3.00 12 4.40 1

REIT services are professional (i.e. managers,valuers, trustee and promoters)

3.51 8 4.27 7 3.20 9 3.80 10

M-REITs yield are attractive compared toother investments

3.49 9 4.18 10 3.40 3 3.40 16

Distribution policy is sufficient 3.41 10 4.27 7 2.80 19 4.20 3

Quality properties are available 3.41 10 4.00 13 3.40 3 3.20 20

REITs properties are well maintained 3.39 12 4.36 1 3.40 3 3.00 23

Reduction in withholding tax rate ondistributions to local investors

3.35 13 4.36 1 2.80 19 4.00 5

Property location is strategic 3.33 14 3.82 17 3.20 9 3.40 16

M-REITs yield in initial 3-5 years areattractive

3.31 15 4.09 11 3.00 12 3.60 12

Institutional investor participation increases 3.31 15 4.09 11 3.00 12 3.60 12

M-REITs market is performing well 3.30 17 3.91 15 2.80 19 4.00 5

M-REITs provide portfolio diversificationwith the stock market

3.29 18 3.55 23 3.40 3 3.00 23

Reduction in withholding tax rate ondistributions to foreign investors

3.25 19 4.00 13 2.80 19 3.80 10

Low fees (i.e. management, trustees) 3.13 20 3.00 27 3.00 12 3.40 16

Investors are well informed (i.e. research,websites)

3.10 21 4.36 1 2.80 19 3.20 20

Regulation is acceptable worldwide 3.04 22 3.64 20 2.40 27 4.00 5

General investor participation increases 2.99 23 3.36 24 2.80 19 3.20 20

M-REITs are attractive to internationalproperty investors

2.98 24 3.82 17 2.80 19 3.00 23

Diversified tenants 2.95 25 3.64 20 3.00 12 2.60 28

Islamic M-REITs market is performing well 2.86 26 2.73 31 2.60 26 3.40 16

More competitive than other REITs 2.72 27 3.27 26 3.00 12 2.00 31

M-REITs will include international propertyin their portfolios

2.65 28 2.91 29 2.40 27 3.00 23

Setting up conventional REIT index 2.64 29 3.36 24 2.40 27 2.80 27

REITs properties are highly diversified 2.53 30 3.00 27 2.40 27 2.60 28

Setting up Islamic REIT index 2.33 31 2.82 30 2.20 31 2.40 30

Overall average score 3.22 3.79 2.98 3.45

183

The overall top 5 specific factors regarding the current performance of M-REITs and

their average ratings were:

1. Risk profile is acceptable 3.75

2. Earning profile increases 3.69

3. Rental rate increases 3.69

4. Malaysian property market performing well 3.67

5. A secure and favourable tax transparency treatment locally 3.59 ,

with “risk profile is acceptable” and “earning profile increases” seen as top priorities,

while “setting up Islamic REIT index” is seen to be in the lowest priority.

Meanwhile, the REIT managers’ top 6 specific factors (all equal) regarding the

current performance of M-REITs and their average ratings were:


1. A secure and favourable tax transparency treatment locally 4.36

1. Tax treatment is appropriate 4.36

1. REITs properties are well maintained 4.36

1. Reduction in withholding tax rate on distributions to local investors 4.36

1. Investors are well informed (i.e. research, websites) 4.36 ,

with “Islamic M-REITs market is performing well” being the lowest priority.

184

The fund manager’s top 8 specific factors regarding the current performance of

M-REITs and their average ratings were:



3. Earning profile increases 3.40


3. M-REITs yield are attractive compared to other investments 3.40

3.Quality properties are available 3.40

3.REITs properties are well maintained 3.40

3. M-REITs provide portfolio diversification with the stock market 3.40 ,

with an acceptable risk profile seen as the top priority, while setting up an Islamic

REIT index being the lowest priority.

The property advisor’s top 4 specific factors regarding the current performance of



1. A secure and favourable tax transparency treatment internationally 4.40


3. Distribution policy is sufficient 4.20 ,

with a secure and favourable tax transparency treatment internationally and locally

seen as top priorities, while M-REITs being more competitive than other REITs seen

as the lowest priority.

6.2.2 REIT Managers

Table 6.2 show the importance of factors regarding the current performance of M-

REITs by REIT managers. All REIT managers agreed that the tax treatment needs to

be appropriate, with a secure and favourable tax transparency treatment locally, which

includes reduction in the withholding tax rate on distributions to local investors. In

185

addition, distribution policy needs to be sufficient. It is also required that REIT

properties should be well maintained to increase the rental rate and earning profile. To

assure investors are well informed (i.e. research, websites), REIT services need to be

professional (i.e. managers, valuers, trustee and promoters).

91% of respondents suggest quality properties should be available, whilst 82% agree

the M-REIT market should perform well, with the risk profile being acceptable and

institutional investor participation increasing. In terms of yield, M-REIT yields should

be attractive compared to other investments, with M-REIT yields in the initial 3-5

needing to be attractive. 73% of respondents agreed that the Malaysian property

market should perform well, with 64% suggesting the importance of a reduction in the

withholding tax rate on distributions to foreign investors. Only 55% of respondents

agreed property location should be strategic, accompanied with diversified tenants

and M-REITs should be attractive to international property investors. In terms of

regulation, only 45% of the respondents recommended a regulation which is

acceptable worldwide; with a secure and favourable tax transparency treatment

internationally; whereas 36% suggested M-REITs should provide portfolio

diversification with the stock market and the importance of the setting up of a

conventional M-REIT index.

Only 27% of the respondents agreed to the importance of a well performing Islamic

M-REIT market and the need for setting up an Islamic REIT index. In addition,

general investor’s participation should increase and M-REIT should be more

competitive than other REITs; whereas 18% of the respondents suggest REIT

properties should be highly diversified and M-REITs should include international

property in their portfolios, while having low fees (i.e. management, trustees).

186


M-REITs: REIT Managers

AverageScore

% 'very-important' /'essential'

Tax treatment is appropriate 4.36 100%

REITs properties are well maintained 4.36 100%

Rental rate increases 4.36 100%

Investors are well informed (i.e. research, websites) 4.36 100%

A secure and favourable tax transparency treatment locally 4.36 100%

Reduction in withholding tax rate on distributions to local investors 4.36 100%

Earning profile increases 4.27 100%

Distribution policy is sufficient 4.27 100%

REIT services are professional (i.e. managers, valuers, trustee and promoters) 4.27 100%

Quality properties are available 4.00 91%

M-REITs market is performing well 3.91 82%

Risk profile is acceptable 3.91 82%

M-REITs yield are attractive compared to other investments 4.18 82%

M-REITs yield in initial 3-5 years are attractive 4.09 82%

Institutional investor participation increases 4.09 82%

Malaysian property market performing well 3.55 73%

Reduction in withholding tax rate on distributions to foreign investors 4.00 64%

Property location is strategic 3.82 55%

M-REITs are attractive to international property investors 3.82 55%

Diversified tenants 3.64 55%

A secure and favourable tax transparency treatment internationally 3.82 45%

Regulation is acceptable worldwide 3.64 45%

M-REITs provide portfolio diversification with the stock market 3.55 36%

Setting up conventional REIT index 3.36 36%

General investor participation increases 3.36 27%

More competitive than other REITs 3.27 27%

Setting up Islamic REIT index 2.82 27%

Islamic M-REITs market is performing well 2.73 27%

REITs properties are highly diversified 3.00 18%

Low fees (i.e. management, trustees) 3.00 18%

M-REITs will include international property in their portfolios 2.91 18%

187

6.2.3 Property Advisors

Table 6.3 shows the importance of the factors regarding the current performance of

M-REITs by property advisors. 80% of the respondents suggest the importance of a

secure and favourable tax transparency treatment locally and internationally, while the

Malaysian property and M-REIT market should perform well, along with the increase

in institutional investor participation.

60% of the respondents agreed on the need for a regulation which is acceptable

worldwide, accompanied with an appropriate tax treatment and a reduction in the

withholding tax rate on distributions to local and foreign investors. In addition, REIT

services should be professional (i.e. managers, valuers, trustee and promoters) and

assure a sufficient distribution policy with an acceptable risk profile and increase in

earnings profile. Furthermore, REIT properties should be well maintained to generate

attractive yields in the initial 3-5 years. However, only 40% of the respondents

suggest the importance of M-REIT yields to be attractive compared to other

investments. In addition, property location should be strategic, with the availability of

quality properties and an increase in the rental rate. It is also suggested that M-REITs

should be attractive to international property investors and M-REITs should include

international property in their portfolios, while providing low fees (i.e. management,

trustees). It was expected that Islamic M-REIT market should perform well.

For 20% of the respondents, they agree on the importance of well informed investors

through research and websites and setting up a conventional REIT index to increase

general investor participation. Meanwhile, M-REITs should provide portfolio

diversification with the stock market and REIT properties should be highly diversified

with diversified tenants. However, none of the respondents agree on the importance of

setting up an Islamic REIT index and M-REITs being more competitive than other

REITs.

188

Table 6.3 Importance of Factors Regarding the Current Performance of

M-REITs: Property Advisors

AverageScore

































189

6.2.4 Fund Managers

Table 6.4 shows the importance of the factors regarding the current performance of

M-REITs by fund managers. 60% of the respondents agreed that the risk profile

should be acceptable, with an increase in rental rates and M-REIT yield should be

attractive compared to other investments. 40% of the respondents agreed that M-

REITs should provide portfolio diversification with the stock market and should

increase their earnings profile and be more competitive than other REITs.

Furthermore, the Malaysian property market should perform well, with the

availability in quality properties and diversified tenants. In addition, REIT services

should be professional (i.e. managers, valuers, trustee and promoters) and REIT

properties should be well maintained. In terms of regulation, a secure and favourable

tax transparency treatment locally and internationally should be important to increase

institutional investor participation.

Only 20% of the respondents agreed that regulation should be acceptable worldwide,

with an appropriate tax treatment which includes a reduction in the withholding tax

rate on distributions to local and foreign investors and a sufficient distribution policy.

In addition, the M-REITs market should perform well with low fees (i.e. management,

trustees) and an attractive M-REIT yield in the initial 3-5 years. M-REITs should also

be attracting to international property investors. Meanwhile, it is important that

investors need to be well informed (i.e. research, websites) to promote general

investor participation increases. It is also important that the Islamic M-REIT market

should perform well, which also includes the setting up of both an Islamic M-REIT

and conventional M-REIT index. In terms of property, it is important that property

location is strategic and REIT properties are highly diversified, with a consideration

that M-REITs will include international property in their portfolios.

190


M-REITs: Fund Managers

AverageScore

































191

6.2.5 Comparison of the Groups of Participants

In terms of each average overall score for the sub-groups, there was different levels

of agreement on the factors influencing current performance of M-REITs between

REIT managers (3.79), fund managers (2.98) and property advisors (3.45), with the

rank correlation between the three groups of 0.24-0.47 (see Table 6.5). Overall, fund

managers has a lower rank correlation (r = 0.24 and 0.42) with the other two groups

and reflects differences to other participants. Meanwhile, the REIT managers (r = 0.42

and 0.47) has a higher rank correlation with other participants.

There were major differences across questions between the three groups. Higher

priority is given by fund managers to M-REITs providing portfolio diversification

with the stock market (3rd versus 23rd and 23rd), while higher priorities were given by

REIT managers to investors should be well informed (i.e. research, websites) (1st

versus 19th and 20th). The Malaysian property market performing well is seen to be

less important to REIT managers (22nd versus 3rd and 3rd), while REIT properties

being well maintained is seen to be less important to property advisor (23rd versus 1st

and 3rd).

Table 6.5: Rank Correlation Between Groups on Importance of Factors

Regarding the Current Performance of M-REITs

REIT managers Fund managers Property advisors

REIT managers 1.00

Fund managers 0.42 1.00

Property advisors 0.47 0.24 1.00

192

In comparing all three groups for significant differences, ANOVA single factor

analysis was used to assess these differences. From the analysis, the p-value less than

0.05 means the differences between the groups are significantly different. Pairwise

comparisons of the means are used to show the least significance difference between

2 specific groups. Table 6.6 shows the importance of factors regarding the current

performance of M-REITs.

193


M-REITs: ANOVA

REITManagers

(n=11)

FundManagers

(n=55)


Significancedifference

Variable Score Score Score

Risk profile is acceptable 3.91 a 3.80 a 3.60 a No

Earning profile increases 4.27 a 3.40 4.00 a Yes

Rental rate increases 4.36 3.60 b 3.60 b Yes

Malaysian property market performing well 3.55 a,b 3.40 b 4.20 a Yes

A secure and favourable tax transparency treatmentlocally

4.36 a 3.00 4.40 a Yes

Tax treatment is appropriate 4.36 a 3.20 4.00 a Yes

A secure and favourable tax transparency treatmentinternationally

3.82 a 3.00 4.40 a Yes

REIT services are professional (i.e. managers, valuers,trustee and promoters)

4.27 a 3.20 3.80 a Yes

M-REITs yield are attractive compared to otherinvestments

4.18 3.40 b 3.40 b Yes

Distribution policy is sufficient 4.27 a 2.80 4.20 a Yes

Quality properties are available 4.00 a 3.40 a,b 3.20 b Yes

REITs properties are well maintained 4.36 3.40 b 3.00 b Yes

Reduction in withholding tax rate on distributions tolocal investors

4.36 a 2.80 4.00 a Yes

Property location is strategic 3.82 a 3.20 b 3.40 a,b Yes

M-REITs yield in initial 3-5 years are attractive 4.09 a 3.00 3.60 a Yes

Institutional investor participation increases 4.09 a 3.00 3.60 a Yes

M-REITs market is performing well 3.91 a 2.80 4.00 a Yes

M-REITs provide portfolio diversification with thestock market

3.55 a 3.40 a 3.00 Yes

Reduction in withholding tax rate on distributions toforeign investors

4.00 a 2.80 3.80 a Yes

Low fees (i.e. management, trustees) 3.00 a 3.00 a 3.40 Yes

Investors are well informed (i.e. research, websites) 4.36 2.80 3.20 Yes

Regulation is acceptable worldwide 3.64 a 2.40 4.00 a Yes

General investor participation increases 3.36 a 2.80 3.20 a Yes

M-REITs are attractive to international propertyinvestors

3.82 2.80 b 3.00 b Yes

Diversified tenants 3.64 a 3.00 a,b 2.60 b Yes

Islamic M-REITs market is performing well 2.73 a,b 2.60 b 3.40 a Yes

More competitive than other REITs 3.27 a 3.00 a 2.00 Yes

M-REITs will include international property in theirportfolios

2.91 a,b 2.40 b 3.00 a Yes

Setting up conventional REIT index 3.36 a 2.40 b 2.80 a,b Yes

REITs properties are highly diversified 3.00 a 2.40 a 2.60 a No

Setting up Islamic REIT index 2.82 a 2.20 a 2.40 a No

Letter notation indicates those means followed by the same letter are not significantly different (P<5%)

194

Results show that all three groups are significantly different in terms of investors are

well informed (i.e. research, websites). However, all three groups are not significantly

different in terms of risk profile is acceptable, REITs properties are highly diversified

and setting up Islamic REIT index. Between the groups, REIT managers find these

factors to be more important.

Meanwhile, REIT managers and property advisors are significantly different, but not

significantly different with fund managers in terms of quality properties are available

and diversified tenants. However, REIT managers and property advisors are not

significantly different, but significantly different with fund managers in terms of

M-REIT market is performing well, earning profile increases, regulation is acceptable

worldwide, distribution policy is sufficient, M-REITs yield in initial 3-5 years are

attractive, tax treatment is appropriate, general investor participation increases,

institutional investor participation increases, REIT services are professional (i.e.

managers, valuers, trustee and promoters), a secure and favourable tax transparency

treatment locally and internationally together with reduction in withholding tax rate

on distributions to local and foreign investors.

Property advisors and fund managers are significantly different, but are not

significantly different with REIT managers in terms of M-REITs will include

international property in their portfolios, Malaysian property market and Islamic M-

REITs market is performing well. However, property advisors and fund mangers are

not significantly different, but significantly different with REIT manager in terms of

rental rate increases, M-REITs are attractive to international property investors,

REITs properties are well maintained and M-REITs yield are attractive compared to

other investments.

REIT managers and fund managers are significantly different, but are not significantly

different with property advisors in terms of property location is strategic and setting

up conventional REIT index. However, REIT managers and fund managers are not

significantly different, while both are significantly different with property advisors in

terms of low fees (i.e. management, trustees), M-REITs provide portfolio

diversification with the stock market and being more competitive than other REITs.

195

This section highlights the key similarities and the differences for all 3 groups. The

key similarities within this 3 group are in terms of investors should be well informed

(i.e. research, websites). However the differences within this 3 group are in terms of

risk profile is acceptable, REITs properties are highly diversified and setting up

Islamic REIT index.

6.2.6 Factor Analysis Regarding Current Performance Factors

From the 31 current performance issues for M-REITs, factor analysis was used to

identify the underlying “property” dimensions for the overall analysis and for the

separate analysis for each of the three groups. From these 31 issues, four to five

underlying dimensions were identified and “named’ using factor analysis. These

dimensions were:

Total: 4 factors accounting for 89.21% of variation

Strategic and regulatory issues (34.43%)

Strategic property issues (20.51%)

Role of property in portfolio (17.87%)

Investment and performance issues (16.40%)

REIT managers: 5 factors accounting for 96.63% of variation


Changing property environment (16.13%)



Diversification in portfolio (12.05%)

Property advisors: 4 factors accounting for 82.22% of variation




196

Fund managers: 3 factors accounting for 82.94% of variation



Specific market dynamics (22.68%)

In terms of the current performance of M-REITs, both REIT managers and fund

manager agree that the strategic and regulatory issues are the most important

dimension which is then followed by the property and other investment dimension.

6.3 Importance of Factors Regarding the Ongoing Success of M-REITs

This will be presented starting with the overall results; then the 3 groups separately;

then followed by a comparison of the 3 groups. The comparison between the 3 groups

will include rank correlation and ANOVA analyses.

6.3.1 Overall

Table 6.7 presents the average scores and respective ranks for the 31 specific issues

for the 96 survey respondents relating to the ongoing success of M-REITs.

197

Table 6.7: Importance of Factors Regarding the Ongoing Success of M-REITs

Total

(n=96)

REITManagers

(n=11)

FundManagers

(n=55)


Variable Score Rank Score Rank Score Rank Score Rank

Malaysian property market performing well 4.24 1 3.45 25 4.20 1 4.60 4

A secure and favourable tax transparencytreatment locally

4.20 2 4.55 2 3.80 2 4.80 1

Tax treatment is appropriate 4.16 3 4.73 1 3.80 2 4.60 4

Quality properties are available 4.15 4 4.09 14 3.80 2 4.80 1

REIT services are professional (i.e. managers,valuers, trustee and promoters)

4.06 5 4.36 6 3.60 11 4.80 1

Rental rate increases 4.01 6 4.55 2 3.80 2 4.20 8

Property location is strategic 4.00 7 4.36 6 3.60 11 4.60 4

Risk profile is acceptable 3.96 8 4.09 14 3.80 2 4.20 8

Reduction in withholding tax rate ondistributions to local investors

3.95 9 4.55 2 3.80 2 4.00 11

Reduction in withholding tax rate ondistributions to foreign investors

3.93 10 4.36 6 3.80 2 4.00 11

A secure and favourable tax transparencytreatment internationally

3.91 11 4.18 12 3.80 2 4.00 11

Investors are well informed (i.e. research,websites)

3.85 12 4.27 10 3.80 2 3.80 19

Earning profile increases 3.82 13 4.45 5 3.60 11 4.00 11

REITs properties are well maintained 3.81 14 4.36 6 3.60 11 4.00 11

M-REITs yield are attractive compared toother investments

3.78 15 4.09 14 3.60 11 4.00 11

Distribution policy is sufficient 3.58 16 4.27 10 3.00 27 4.40 7

M-REITs market is performing well 3.57 17 3.73 21 3.20 18 4.20 8

M-REITs yield in initial 3-5 years areattractive

3.55 18 4.09 14 3.20 18 4.00 11

Regulation is acceptable worldwide 3.53 19 3.91 20 3.20 18 4.00 11

M-REITs are attractive to internationalproperty investors

3.53 19 4.00 18 3.40 16 3.60 21

M-REITs provide portfolio diversificationwith the stock market

3.44 21 3.64 22 3.20 18 3.80 19

General investor participation increases 3.36 22 4.18 12 3.40 16 3.00 25

Institutional investor participation increases 3.29 23 4.00 18 3.20 18 3.20 23

Diversified tenants 3.19 24 3.64 22 3.20 18 3.00 25

More competitive than other REITs 3.17 25 3.36 27 3.00 27 3.40 22

Setting up conventional REIT index 3.17 25 3.45 25 3.20 18 3.00 25

Low fees (i.e. management, trustees) 3.15 27 3.27 28 3.20 18 3.00 25

Islamic M-REITs market is performing well 3.09 28 2.82 31 3.20 18 3.00 25

Setting up Islamic REIT index 2.71 29 2.91 30 2.40 31 3.20 23

REITs properties are highly diversified 2.64 30 3.55 24 2.80 29 2.00 31

M-REITs will include international propertyin their portfolios

2.52 31 3.00 29 2.60 30 2.20 30

Overall average score 3.59 3.94 3.41 3.79

198

The overall top 5 specific factors regarding the ongoing success of M-REITs and their

average ratings were:




4. Quality properties are available 4.15

5. REIT services are professional (i.e. managers, valuers, trustee and promoters) 4.06 ,

with “the Malaysian property market performing well” and a “secure and favourable

tax transparency treatment locally” clearly seen as the top priorities. The lowest

priority is given to “M-REITs including international property in their portfolios”.

Meanwhile, the REIT managers’ top 5 specific factors regarding the ongoing success

of M-REITs and their average ratings were:




2. Reduction in withholding tax rate on distributions to local investors 4.55

5. Earning profile increases 4.45 ,

with an “appropriate tax treatment” clearly seen as the top priority. The lowest

priority is the “Islamic M-REITs market should perform well”.

199

The fund managers’ top 8 specific factors regarding the ongoing success of M-REITs

and their average ratings were:


2. A secure and favourable tax transparency treatment locally and internationally 3.80





2. Reduction in withholding tax rate on distributions to local and foreign investors 3.80

2. Investors are well informed (i.e. research, websites) 3.80 ,

with the “Malaysian property market performing well” clearly seen as the top priority.

The lowest priority is the “setting up of an Islamic REIT index”.

The property advisors’ top 6 specific factors regarding the ongoing success of




1. REIT services are professional (i.e. managers, valuers, trustee and promoters) 4.80



4. Property location is strategic 4.60 ,

with a “secure and favourable tax transparency treatment locally”, “quality properties

are available” and “REIT services are professional (i.e. managers, valuers, trustee and

promoters)” clearly seen as the top priorities. The lowest priority is “REIT properties

should be highly diversified”.

200

6.3.2 REIT Managers

Table 6.8 shows the importance of factors regarding the current performance of

M-REITs by REIT managers. All 11 REIT managers fully agree the importance of

increasing earning profile accompanied by an appropriate tax treatment, which

includes a secure and favourable tax transparency treatment locally and a reduction in

withholding tax rate on distributions to local investors. In addition, it is important for

property location to be strategic, REIT properties should be well maintained and the

rental rate should increase.

91% of the REIT managers find that it is important for the availability of quality

properties and well-informed investors; whereas 82% agree that the risk profile

should be acceptable, while M-REITs having attractive yields in the initial 3-5 years

and general investor participation increases, which are accompanied by professional

REIT services (i.e. managers, valuers, trustee and promoters). In addition, a secure

and favourable tax transparency treatment internationally, with a reduction in the

withholding tax rate on distributions to foreign investors is also important.

73% recognize it is essential for REIT properties to be highly diversified with

sufficient distribution policy, while 64% agree the M-REIT market should perform

well, resulting from acceptable regulation worldwide, along with diversified tenants

and M-REITs having an attractive yield compared to other investments. Other factors

include M-REITs should be attractive to international property investors, while

institutional investor participation should increase. 45% agree that the Malaysian

property market should perform well and M-REITs should provide portfolio

diversification with the stock market. 36% consider it is important to have low fees

(i.e. management, trustees) and to set up the conventional REIT index. Meanwhile,

27% agree Islamic M-REITs market should perform well and M-REITs should be

more competitive than other REITs, while 18% agree the importance of setting up an

Islamic REIT index and including international property in M-REIT portfolios.

201

Table 6.8: Importance of Factors Regarding the Ongoing Success of

M- REITs: REIT Managers

AverageScore

































202


Table 6.9 shows the importance of factors regarding the ongoing success of

M-REITs by property advisors. All property advisors fully agree on the importance of

professional REIT services (i.e. managers, valuers, trustee and promoters) and a

secure and favourable tax transparency treatment locally, with availability in quality

properties. Meanwhile, 80% recognize the importance of the Malaysian property

market performing well, resulting from an acceptable risk profile and an appropriate

tax treatment, with an acceptable regulation worldwide that includes a sufficient

distribution policy. In addition, property location must be strategic and M-REIT

properties well maintained.

60% of the respondents agree that it is important for the M-REIT market to perform

well, with an increase in earnings profile. In terms of yield, M-REITs should be

attractive compared to other investments, M-REIT yields in initial 3-5 years should be

exceptional and M-REITs providing portfolio diversification with the stock market.

Furthermore, they believe rental rates should increase, while investors should be well

informed (i.e. research, websites). Additionally, it is also deemed important to have a

secure and favourable tax transparency treatment internationally and for a reduction in

the withholding tax rate on distributions to local and foreign investors.

40% of respondents recognized that tenants should be diversified and M-REITs

should be more attractive to international property investors and more competitive

than other REITs. Other than that, setting up an Islamic REIT index is considered to

be important. However, only 20% agree that setting up a conventional REIT index is

important, while supporting the idea that the Islamic M-REITs market should perform

well. In addition, they agree that general and institutional investor participation should

increase and have low fees (i.e. management, trustees). None of the respondents

consider it is important for M-REITs to include international property in their

portfolios and highly diversify REIT properties.

203


M-REITs: Property Advisors

AverageScore

































204

6.3.4 Fund Managers

Table 6.10 show the importance of factors regarding the ongoing success of

M-REITs by fund managers. 80% of the respondents agree it is important for the

Malaysian property market to perform well, while the risk profile needs to be

acceptable and rental rates increase. Meanwhile, 60% consider M-REIT yields should

be attractive compared to other investments and increase its earning profile. In

addition, tax treatment should be appropriate, with a secure and favourable tax

transparency treatment locally and internationally. Reduction in the withholding tax

rate on distributions to local and foreign investors should also be important.

Furthermore, REIT services should be professional (i.e. managers, valuers, trustee and

promoters) since investors need to be well informed (i.e. research, websites), while

REIT properties should be well maintained, with availability of quality properties.

40% of the respondents deem it important for the M-REIT market to perform well;

therefore, the regulations should be acceptable worldwide and distribution policy

sufficient. In addition, M-REIT yields in the initial 3-5 years should be attractive, as it

is essential for M-REITs to be attractive to international property investors; thus

increasing institutional investor participation. Other factors include strategic property

location, diversified tenants and setting up a conventional REIT index.

However, only 20% of the respondents agree on the importance of setting up an

Islamic REIT index and consider the Islamic M-REIT market should perform well. In

this matter, it is required for M-REITs to have low fees (i.e. management, trustees),

while REIT properties need to be highly diversified and M-REITs should consider

including international property in their portfolios. This means REITs need to be more

competitive and provide portfolio diversification with the stock market to increase

general investor participation.

205


M-REITs: Fund Managers

AverageScore

































206

6.3.5 Comparison of the Three Groups of Participants

In terms of each average overall score for the sub-groups, there was good agreement

for the ongoing success factors, there was a very good agreement with REIT

managers (3.94), fund managers (3.41) and property advisors (3.79) with the rank

correlations ranging from 0.62 to 0.67 (see Table 6.11). Overall, fund managers has a

significant correlation (r = 0.62 and 0.64) and reflects lesser differences to other

participants. Meanwhile, the REIT managers (r = 0.64 and 0.67) has a higher

correlation with other participants. In comparison to other participants (r = 0.42 to

0.47), fund managers has a lower correlation with other participants, which concludes

that fund managers are significantly different. In summary, the participants’ views on

the future priorities are more highly correlated than their views on current priorities.

There were major differences across questions. Higher priority is given by fund

managers to investors should be well informed (i.e. research, websites) (2nd versus

10th and 19th), while a higher priority is given by property advisors to the M-REIT

market performing well (8th versus 18th and 21st). The Malaysian property market

performing well is seen to be less important to REIT manager (25th versus 1st and 4th),

while sufficient distribution policy is seen to be less important to fund managers (27th

versus 7th and 10th).

Table 6.11: Rank Correlation Between Groups on the Importance of Factors

Regarding the Ongoing Success of M-REITs

REIT managers Fund managers Property advisors

REIT managers 1.00

Fund managers 0.62 1.00

Property advisors 0.67 0.64 1.00

Meanwhile, Table 6.12 shows the significant differences between the three groups for

the importance of factors regarding the ongoing success of M-REITs.

207


ANOVA

REITManagers

(n=11)

FundManagers

(n=55)


Significancedifference

Variable Score Score Score

Malaysian property market performing well 3.45 4.20 4.60 Yes

A secure and favourable tax transparency treatmentlocally

4.55 a 3.8 4.8 a Yes

Tax treatment is appropriate 4.73 a 3.8 4.6 a Yes

Quality properties are available 4.09 a 3.8 a 4.8 Yes

REIT services are professional (i.e. managers, valuers,trustee and promoters)

4.36 3.6 4.8 Yes

Rental rate increases 4.55 a 3.8 4.2 a Yes

Property location is strategic 4.36 a 3.6 4.6 a Yes

Risk profile is acceptable 4.09 a,b 3.8 b 4.2 a Yes

Reduction in withholding tax rate on distributions tolocal investors

4.55 a 3.8 b 4 a,b Yes

Reduction in withholding tax rate on distributions toforeign investors

4.36 a 3.8 b 4 a,b Yes

A secure and favourable tax transparency treatmentinternationally

4.18 a 3.8 a 4 a No

Investors are well informed (i.e. research, websites) 4.27 a 3.8 a 3.8 a No

Earning profile increases 4.45 a 3.6 4 a Yes

REITs properties are well maintained 4.36 a 3.6 b 4 a,b Yes

M-REITs yield are attractive compared to otherinvestments

4.09 a 3.6 4 a Yes

Distribution policy is sufficient 4.27 a 3 4.4 a Yes

M-REITs market is performing well 3.73 a,b 3.2 b 4.2 a Yes

M-REITs yield in initial 3-5 years are attractive 4.09 a 3.2 4 a Yes

Regulation is acceptable worldwide 3.91 a,b 3.2 b 4 a Yes

M-REITs are attractive to international propertyinvestors

4.00 a 3.4 b 3.6 a,b Yes

M-REITs provide portfolio diversification with thestock market

3.64 a 3.2 3.8 a Yes

General investor participation increases 4.18 3.4 b 3 b Yes

Institutional investor participation increases 4.00 3.2 b 3.2 b Yes

Diversified tenants 3.64 a 3.2 a 3 a No

More competitive than other REITs 3.36 a,b 3 b 3.4 a Yes

Setting up conventional REIT index 3.45 a 3.2 a,b 3 b Yes

Low fees (i.e. management, trustees) 3.27 a 3.2 a 3 a No

Islamic M-REITs market is performing well 2.82 a 3.2 a 3 a No

Setting up Islamic REIT index 2.91 a,b 2.4 b 3.2 a Yes

REITs properties are highly diversified 3.55 2.8 2 Yes

M-REITs will include international property in theirportfolios

3.00 a 2.6 a,b 2.2 b Yes

Letter notation indicates those means followed by the same letter are not significantly different (P<5%)

208

Results show that all three groups are significantly different in terms of Malaysian

property market performing well, REIT properties are highly diversified and REIT

services are professional (i.e. managers, valuers, trustee and promoters). REITs

properties are highly diversified is the more important factor to REIT managers, while

property advisors find the other two factors to be more important. However, all three

groups are not significantly different in terms of Islamic M-REITs market is

performing well, diversified tenants, investors are well informed (i.e. research,

websites), low fees (i.e. management, trustees), a secure and favourable tax

transparency treatment internationally. Islamic M-REITs market performing well is

seen to be more important to fund managers, while the later factors are seen to be

more important to REIT managers.

REIT managers and property advisors are significantly different, but not significantly

different with fund managers in terms of M-REITs will include international property

in their portfolios and setting up conventional REIT index. However, REIT managers

and property advisors are not significantly different, but significantly different with

fund managers in terms of earning profile increases, distribution policy is sufficient,

M-REITs yield are attractive compared to other investments, M-REITs yield in initial

3-5 years are attractive, tax treatment is appropriate, M-REITs provide portfolio

diversification with the stock market, property location is strategic, rental rate

increases, and a secure and favourable tax transparency treatment locally.

Property advisors and fund managers are significantly different, but are not

significantly different with REIT managers in terms of M-REIT market is performing

well, risk profile is acceptable, regulation is acceptable worldwide, more competitive

than other REITs and setting up Islamic M-REIT index. However, property advisors

and fund mangers are not significantly different, but significantly different with REIT

manager in terms of general investor participation increases and institutional investor

participation increases

REIT managers and fund managers are significantly different, but are not significantly

different with property advisors in terms of REIT properties are well maintained,

M-REITs are attractive to international property investors, reduction in withholding

tax rate on distributions to local and foreign investors. However, REIT managers and

209

fund managers are not significantly different while both are significantly different

with property advisors in terms of quality properties are available.

The key similarities within the 3 groups are in terms of Islamic M-REIT market is

performing well, diversified tenants, investors are well informed (i.e. research,

websites), low fees (i.e. management, trustees), a secure and favourable tax

transparency treatment internationally. However the differences within the 3 groups

are in terms of Malaysian property market performing well, REIT properties are

highly diversified and REIT services are professional (i.e. managers, valuers, trustee

and promoters).

6.3.6 Factor Analysis Regarding Ongoing Success Factors for M-REITs

From the 31 issues regarding the ongoing success of M-REITs, underlying

dimensions were identified using factor analysis for overall and the three groups.

These dimensions are named, based on the results of the factors generated using

SPSS. These dimensions were:

Total: 5 factors accounting for 88.97% of variation



Specific market dynamics (16.83%)



210

REIT managers: 6 factors accounting for 98.79% of variation






Changing property environment (6.53%)

Property advisors: 3 factors accounting for 97.06% of variation




Fund managers: 3 factors accounting for 96.79% of variation




In terms of the important factors regarding the ongoing success of M-REITs, both

fund managers and property advisors agree that the regulatory issues are the most

important dimension, which is then followed by investment and performance issues

and other property investment issues. This further reinforces the similarities between

the key dimensions for the current performance of M-REIT and the important

dimensions regarding the ongoing success of M-REITs.

6.4 Comments from Respondents

As well as the quantitative aspects of this M-REIT survey, respondents also gave

specific comments concerning M-REITs. These comments are summarised in this

section.

211

6.4.1 M-REIT Fund Managers

REITs are capital market instruments with a mandate to invest and optimize property

assets; thus REITs are dependent on the inter-relationship between the capital markets

and property markets. Upturns in the property market may provide potential income

increases for REITs, while downturns may provide acquisition opportunities. It is

essential for the M-REIT market to perform well, as the cost of capital is typically

advantageous for M-REITs to grow their asset base. It is also very important for the

risk profile to be acceptable, as risk management is important from the standpoint of

income or dividend stability. It is suggested that the REIT portfolio must be structured

to maintain low risk to avoid dividend disruption, as the majority of REIT investors

are income-oriented. Thus, dividend forecasts, distribution policy and increases in

earning profile are essential. As foreign investors are increasing their investment in

M-REITs, it is very important for the M-REIT regulations to be consistent with

worldwide REIT developments regarding REIT structures and guidelines. Given the

nascent development of M-REITs, it is essential for M-REIT yields to be attractive

compared to other investments, as most domestic investors currently assess M-REIT

yields vis-à-vis current investment alternatives such as equities and bonds. It is also

essential that M-REIT yields in the initial 3-5 years are attractive to attract domestic

investors, who are relatively unfamiliar with the REIT product; however a high-

yielding REIT also includes an additional risk premium.

Several M-REITs are still conventional M-REITs as there are limitations on Islamic

REITs. Property investment must be Shariah-compliant and limitations also exist on

the type of properties and it’s percentage as stated in the Securities Commission’s

REIT guidelines and the trust deed. An appropriate tax treatment is essential as M-

REITs are compared to domestic investment alternatives; thus tax transparency is

relevant. It is also very important that M-REITs provide portfolio diversification with

the stock market, following worldwide trends. M-REITs should provide

diversification with the market, i.e. a low beta, to enable M-REITs to act as an

alternative asset class compared to stocks and bonds. To a certain point, the

availability of quality properties seems to be a subjective issue, as quality properties

may be construed as high-end properties. REITs manage and optimise a portfolio of

properties; thus yield, yield accretion and risk management are important assessment

212

factors, as REITs can invest and manage high-quality or low-end properties (e.g.

lower income hypermarkets, etc). Strategic property location is generally essential as

a key fundamental to ensure that a property maintains a high-yielding performance or

income stability. Diversification of REIT’s properties need be done at a portfolio level

or where the economies of property portfolio make sense. REIT properties should be

well maintained and generate high-yield and improving that yield requires

professional property management. Diversified tenants are very important to ensure

that the property tenant mix is not too dependent on any specific industry sector or

tenant which may be prone to economic cyclical downturns, thus affecting the REIT's

income. It is necessary for distribution policy to be attractive, as distribution policy

and dividend forecasts are essential for a majority of REIT investors. In generating

growth for M-REITs, positive rental reversion is important to enable growth in REIT

income.

In international context, it is essential for M-REITs to be attractive to international

property investors. International property investors from mature REIT markets

provide implicit guidance and support for the M-REIT sector to develop along

international best practices. M-REITs may include international property in their

portfolios in the future. The key imperative for M-REITs is to actively manage and

optimise property portfolio performance. Managing properties in international

locations requires understanding of the respective international markets to ensure

competitive performance. M-REITs need to be more competitive than other REITs as

foreign investors will prompt comparison with other REITs worldwide.

It is also very important for the increase in general investor’s participation on M-

REITs. Investors should be well informed (i.e. research, websites); hence, it is

essential to maintain continual and consistent disclosure to key investors. Creating

awareness and educating retail investors is important to develop them in the market

while institutional investor participation ensures REITs remain a primary product for

institutional investors.

In terms of management, professional REIT services are essential (i.e. managers,

valuers, trustee and promoters). The competitive advantage of REITs over other

property-owning vehicles will be seen in their professional execution of their duties

213

and responsibilities. Low fee structures (i.e. management, trustees) should be

benchmarked internationally according to measures such as MER. The setting up of a

conventional REIT index would be helpful to provide a benchmark for existing

REITs. However, the overall end result is the performance of the REIT.

A secure and favourable tax transparency treatment locally and internationally is

essential, as REITs worldwide are known to be tax transparent. Reductions in the

withholding tax rate on distributions to local and foreign investors are important.

Relative to the REIT market in Malaysia, the withholding tax is 10% for individual

investors by 2009 and is constantly compared to Singapore which allows 0% for its

resident investors. In addition, the key to attracting foreign investors would be to

maintain a competitive tax regime vis-a-vis local regional REIT markets.

Some of the respondents’ suggestions for the ongoing success of M-REITs included

loosening regulations on M-REITs to equivalent practices overseas, e.g. debt gearing

cap by remove existing 50% cap and allow free-market forces (as in the US),

development capability which allow REITs partial development capability (e.g. total

value not exceeding 20% of current asset size), review of the existing Valuers,

Appraisers and Estate Agents Act 1981 which only permits registered valuers as third-

party property managers - a regulation which applies and restricts REITs, and

harmonisation of the withholding tax regime to international standards. By 2009,

Malaysian residents are taxed at 10% (vs 0% in Singapore) while foreigners are taxed

at 10% for non-resident individual and institutional and 25% for non-resident

corporate (vs 10% in Singapore).


There are several factors deemed important in the opinion of property advisors on the

current performance of M-REIT; this includes dividend growth and accumulation of

new assets. Other significant risk factors regarding M-REITs are the sale and

leaseback mechanism on a guaranteed return of 7% is not wholly desirable and debt

leverage has helped to arbitrage, and it is helpful if the loan levels are kept low. Other

important factors for the ongoing success of M-REITs includes the strength of the

214

owners behind the REITs, the accumulation and injection of new properties indicating

growth strategies, dividend growth, volatility market, transparency and open

disclosure of all matters finance and legal.

6.4.3 Fund Managers

From the fund manager’s extensive survey, all respondents agree South East Asia is

seen to be a very good REIT market, although the M-REIT market is still in its early

phase. There is a lot to develop, as they were just launched 2 years ago. Currently, the

performance of M-REITs varies. Only a few can be considered to have performed

well. Many M-REITs initially did well after IPO, but have faltered; due to several

factors particularly since the government did not lower the withholding tax on

dividends, which had been expected. At the time of the survey, there are still no M-

REITs which included international property. To a certain extent, it is important that

low fees are given to management and trustees, although it is considered appropriate

to give higher fees to professional REIT managers to reduce costs and ensure that

REITs are properly managed. Many REITs do not have managers who are dedicated

to the REIT, but are only doing it part-time. During the survey, interest rates

narrowing by 50 basis points. A narrowing interest rate differential between Malaysia

and U.S. rates suggests little pressure on the ringgit peg. This would encourage trades

more attractive at 200-280 bps difference. Respondents agree on the other significant

risk factors on the current performance of M-REITs, which include management

delivery, liquidity and gearing.

The survey also indicated future plans to invest in M-REITs, as it has defensive

features; particularly in light of the US economic slowdown and Malaysian equities

becoming expensive. M-REITs provide a stable income stream for at least 2 years and

low risk associated due to this stable income. It is important for M-REIT risk profiles

to be acceptable, especially during the US economic slowdown period. The fully

valued Malaysian stock market encourages many fund managers to seek defensive

stocks such as M-REITs. Other factors which influence fund managers to invest in M-

REITs include liquidity, market stability, quality of the assets, gearing, and delivery

of proactive management with a proven track record, the ability to increase asset size,

215

attractive yield relative to other fixed income instrument vis-à-vis risk-free rate and

tax advantages. Respondents also agreed the assessment on specific REIT players will

also influence fund managers’ decisions to invest in REITs.

Several of the fund managers invest in Islamic M-REITs as it is a defensive stock that

is Shariah compliant, and their clients require them to invest in Shariah compliant

stocks only. Unfortunately, during the survey period, Axis REIT, which is probably

the best managed REIT in Malaysia, was not Shariah compliant; only converting to

being an Islamic REIT in December 2008. A number of fund managers favour

Al-Hadharah Boustead–CPO REIT which leverages on the increasing CPO.

According to the average fund manager’s survey results, the percentage of M-REITs

in investment portfolios ranges between 1-10% for conventional M-REITs and 0.5-

3% for Islamic M-REITs.

However, several fund managers decline to invest in M-REITs as yields are not

attractive and there are not many REITs in the market. The small size of most

Malaysian REITs renders them not attractive to big funds. Size of the assets is not

large enough to attract foreign buyers, resulting from a difficulty to find quality

assets. This is followed by poor liquidity. Another reason which deterred the interest

of foreign investors towards M-REITs is the tax treatments which are not attractive

relative to other countries (i.e. Singapore). Almost all Malaysian REITs were set up

by companies wanting to dispose of their properties, particularly since they were

exempted from capital gains tax if they allocated them into REITs. The risk is that the

appointed REIT manager, who is usually an employee of the selling company, will

not manage the properties very well. The only Malaysian REIT which appears to add

value to its properties and continuously search for undervalued properties to acquire is

Axis REIT. As decreasing rents will affect yields and other associated risks (i.e.

regulatory risk, sector risk, country risk, execution risk), more companies are shifting

outside of Kuala Lumpur due to higher rent prices. Meanwhile, all Islamic M-REITs

appear to be vehicles used by the vendor companies to dispose of their properties.

For the ongoing success of M-REITs, all fund managers agree that it is important for

M-REITs to yield attractive dividends compared to other investments, as high

dividend gives more incentives to investors. This is essential to gain investors’

216

confident. Several respondents also find it important for M-REITs to be attractive to

international property investors and to REITs in other international markets.

Currently, the M-REIT market needs to compare with other markets (i.e. Singapore);

especially in terms of tax transparency. All respondents agree that a reduction in

withholding tax is important. For a REIT to grow, a number of respondents agree that

buying a good property is essential, as well as the investor’s track record on

management and results. It is not easy for REITs to grow in Malaysia, as the property

market in Malaysia is small. Although the REIT market is undervalued, there is still

potential in terms of commercial REITs, as retail REITs were seen to improve

significantly in the last 3 years.

6.5 Conclusion

The survey results have revealed the key elements on the importance of the factors

regarding the current performance and the ongoing success of M-REITs. For all three

groups, the key points in which they have equal agreement on the importance of

factors regarding the current performance of M-REITs are dividend growth and

acquisition of new assets, while the significant risk factors regarding M-REITs is the

level of borrowings. In terms of factors for the ongoing success, growth strategy is

considered to be a significant factor, which includes professional management,

acquisition of new assets, dividend growth and transparency in every aspect;

especially in terms of regulation and finance.

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CHAPTER 7

SUMMARY

7.1 Summary of Contributions of the Research

As stated in Chapter 1, this research aims to contribute and expand on the existing

research on REITs; particularly concerning the significance of Malaysian REITs and

Islamic REITs in regional and global aspects. Among the contributions include the

development of a Malaysian REIT index and Islamic M-REIT index, since a Malaysian

REIT performance series is currently not available. This will provide clear empirical

information on M-REIT and give greater opportunity to all M-REIT investors.

7.2 Summary of Limitations

This research is only a preliminary analysis of M-REITs and Islamic REITs in

Malaysia. A short sample period is not nearly long enough in terms of analysing

investment returns comparable to those achievable in regional markets (eg. Singapore

and Hong Kong) in a pan-Asia portfolio (Osmadi, 2007a). The use of a short sample

period to draw longer term inferences on the performance of REITs is inappropriate

as the sample period may coincide with a boom or bust period (Han and Liang, 1995).

Moreover, a short time period accompanied by a small number of M-REITs is not a

reliable indicator to the long term performance of M-REITs, let alone Islamic REITs.

At this stage, M-REITs have only been available since September 2006, so a fuller

time series will need to be subsequently analysed before rigorous recommendations

regarding M-REITs and Islamic REITs can be made.

218

In addition, the use of KLCI as a performance comparison is not fully appropriate as

the KLCI consists of large capitalisation shares while M-REITs consist of smaller

capitalisation shares. Furthermore, the lack of direct property performance measures

constrains the performance results. Performance analyses will be conducted in the

future as there is potential in regulation changes (Jones Lang LaSalle, 2006), investor

participation and property acquisition into REITs.

7.3 Suggestions

The short history in M-REIT data is not nearly long enough in terms of analysing

investment returns comparable to those achievable in regional markets. Despite

anticipated rising interest rates, the share price is expected to pick up again following

improvements to the M-REIT guidelines in the future. Malaysian REITs are destined

to grow further with the right strategy. To be sustained in the challenging environment

of investment, parties involved need to revive and monitor to improve the M-REIT

industry to attract more investors: Suggestions are as follows:

Generate more interest and confidence to investors by education which

includes research and understanding.

Acquire diversified and quality properties in strategic locations to obtain high

returns. Properties such as government-linked companies, airports, banks

(conventional and Islamic bank) and infrastructure projects such as toll roads

should be considered. High-income generating properties would be significant

during an economy downturn.

More relaxation to the current guidelines-possibility of a new tax structure and

tax-exemption to unit-holders to promote growth as modelled by the

Singapore REIT structure.

219

Management strength needs to be enhanced with more professional and

experienced property managers especially in building a competitive business

model, acquiring diversified tenants, using a good strategy in arranging lease

agreements and refinancing for future growth particularly in rental earnings,

further property development and capital appreciation to increase the unit

price.

Consistent and high distribution yields of >8% or higher than other defensive

investment vehicles, this includes high distribution ratios of >90% of net

income.

Cross-border listing and acquiring overseas assets to boost growth.

However, there is number of issues that could limit the further development for

Islamic M-REITs:

Given the constraints and the limitations given by the Islamic law, would

companies choose to issue an Islamic REIT? Given Islamic law restrictions,

this would make Islamic REITs less desirable compared to conventional

REITs. Policymakers need to tackle the regulatory framework.

Efforts should be made to increase the capacity of Shariah compliant

buildings.

Attaining standardised guidelines for Islamic M-REITs should be generally

acceptable to all Muslims investors around the world.

The need to assign a specific compliance committee to monitor every potential

investment decision made for an Islamic M-REIT.

220

To make the Islamic market a success, Shariah expertise should address the

needs of Muslim investors worldwide and not just cater for investors in the

Gulf region but target the local market as well.

Educating investors-experts need to raise the level of understanding,

awareness and acceptance of Islamic M-REITs.

To make Islamic M-REITs a complete success, the regulators should consider a

global marketing strategy. With the introduction of Islamic M-REITs, M-REITs will

play an important role in the Malaysian real estate market and it is likely that the

Islamic compliant property market is poised to become significant within the global

financial markets. Islamic investment products are likely to see significant future

growth in many countries. With the introduction of Islamic M-REITs in the future, it

is likely that the Islamic compliant property market is poised to become significant

within the global financial markets. The main purpose of Islamic finance is to

eliminate unethical financial transactions such as interest. Currently, Islamic financial

institutions are advancing and improving their products to attract more diversified

global investors.

7.4 Summary of Future Research

Future research will need to be conducted which will examine the development,

performance and impact of Malaysian REITs in the local and global REIT market.

Analyses will also need to be conducted over longer time period for Malaysian

REITs to provide the basis for future research regarding the performance and

strategic development of Malaysian REITs and Islamic M-REITs as a successful

REIT product in Asia. Associated investor surveys will see a much richer and

informed analysis than that just provided by the empirical performance analysis.

Personal interviews will also need to be conducted and a survey in the form of a

questionnaire will also need to be distributed to assess investor attitudes to Malaysian

REITs and Islamic M-REITs both with Malaysian and international investors. As

221

there are more Malaysian REITs to be developed, this on-going research will be

significant to the successful growth of the Malaysian REIT market.

Although the market for Islamic M-REITs is still small, there is plenty of room for

further development. Support for this product is growing as Muslims become more

concerned over true Islamic regulation and more investors become aware that they

can get a better advantage with Islamic products. Since Islamic M-REITs were only

recently listed, the short time series shows that it is too early to say that Islamic M-

REITs will not be a successful product in the future. There is an increased demand for

Islamic products, as there is success in Islamic bonds and Islamic finance. In addition,

conventional foreign banks, such as HSBC, Citibank and UBS, are also offering a

range of Islamic financial products.

The future for Islamic REITs at an international level looks promising, as Dubai is

also considering an Islamic REIT structure, while Amanah Raya Bhd (the first

Malaysian Government firm to form a REIT) plans to list its second real estate

investment trust (REIT) in both Malaysia and in Dubai. It is also expected that the UK

will establish an Islamic REIT market as it is the most preferred location for Shariah

investment compared to other countries in Europe (Parsa, 2005). Undeniably, a global

property investment strategy is the key to a successful REIT market. As this area will

have an increased importance in the future, investors and property related companies

should take this opportunity to expand their knowledge and expertise in this area of

Islamic finance and Islamic REITs to extend their property business opportunities

globally.

222

Research by the RICS (2006) concluded that the UK is the most preferred location for

Shariah investment compared to other countries in Europe. However, 62% of overall

respondents think that the Middle East is a good location for Shariah investments, as

the Middle East consists of more Muslim populations compared to other countries.

Only 38% view South East Asia as potential locations for Shariah investment.

Based on the Jones Lang LaSalle (2004) Real Estate Transparency Index, Southeast

Asia seems to be the most probable location for the introduction of an Islamic REIT

market, as it is more transparent compared to the Middle East. Al Islami Far Eastern

Real Estate Fund, sponsored by Dubai Bank and Cheung Kong Group in Hong Kong

aims to make opportunistic property investments in selected Asian cities including

Hong Kong, Singapore, Kuala Lumpur, Seoul, Shanghai, and Beijing. Malaysia and

Indonesia are the both populous Islamic countries in Asia whilst Singapore, Thailand

and the Philippines have a sizable share of Muslim communities. Their growth is

expected to increase with an enhanced regulatory framework to encourage REITs.

Furthermore, investors in Southeast Asian countries are taxed higher than the Middle

East, and REITs therefore offer tax efficient investments that are seem to be more

favourable investments.

In addition, Malaysia and Indonesia are gearing up in terms of developing and

refining their Islamic financial instruments to attract more Middle Eastern investment

in these countries. Singapore is trying to expand their horizon further, but with lack of

expertise and knowledge in Islamic laws, their efforts seem to be stalled. However, to

draw more international investors, Malaysian policymakers need to review the current

withholding tax of 25 per cent for foreign investors which are less favourable

compared with Singapore 10 percent and Hong Kong at 17.5 percent.

223

Overall, further research is clearly needed to further expand the understanding of

REITs in Malaysia, their investment dynamics and investor appeal. With the expected

future growth of M-REITs after the global financial crisis, this research will provide

increased understanding of M-REITs in an investment portfolio. In particular, this

understanding will also be relevant to the development of Islamic REITs, with the

expected future growth in Islamic property investment products and opportunities

globally.

224

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APPENDICES

COPY OF QUESTIONNAIRES ANDPUBLISHED PAPERS

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Appendix I

The Survey Questionnaire for REIT Managers

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Appendix II

The Survey Questionnaire for Property Managers

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Appendix III

The Survey Questionnaire for Fund Managers

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Appendix IV

Global REITs

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Appendix V

M-REITs Case Studies

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Appendix VI

Newell, G. and Osmadi, A.The development and preliminary performance analysis of

Islamic REITsin MalaysiaJournal of Property Research, 26: 4, 329 — 347

Special issue: Global perspectives on REITs and property companies

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Appendix VII

Newell, G. and Osmadi, A.Assessing the importance of factors influencingthe future development of REITs in Malaysia

Pacific Rim Property Research Journal, 16: 3, 358-374

Documents

THE MALAYSIAN REIT DEVELOPMENT AND THEIR ROLE