Malaysia has never been a great exchange listing for REITs, even though there is an abundance of land, with real estate and construction projects constantly happening.
In fact, I daresay there are only a handful of good M-REITs that fit into long-term investing mandates and requirements.
But when compared with S-REITs, most, if not all M-REITs fall short in terms of quality and long-term potential returns.
To not deviate from the purpose of today’s article, all I can say is that it’s not just the current dividend yield that makes a REIT, but rather the growth runway and the predictability of its growth prospects that matter more.
However, recent news of a potential new REIT listing on Bursa got me to dig deeper.
Paradigm REIT
Malaysians, especially those living in Klang Valley and Johor, would be familiar with Paradigm Malls. The rumoured REIT set to IPO is expected to be Paradigm REIT.
There are currently 2 Paradigm Shopping Malls, one in Petaling Jaya and one in Johor Bahru. These malls are currently managed by and under the ownership of WCT Holdings Berhad (KLSE: WCT).
According to news outlets, WCT will be looking to dispose of 3 retail properties from its current total of 5 retail properties.
A quick check reveals that WCT owns 4 of the retail properties that it manages. These include the 2 Paradigm malls mentioned, as well as Bukit Tinggi Shopping Centre and gateway@klia2. Additionally, it owns the concession rights to manage Skypark Terminal, which is Subang airport, from 4 December 2007 to 3 December 2037 with an option to extend for 29 more years.
I deduce that the 3 malls to be injected into Paradigm REIT will likely be the 2 Paradigm malls and Bukit Tinggi Shopping Centre.
And a quick check of their latest valuation shows a total value of approximately RM 2.4 billion.
Retail mall latest performances
WCT has conveniently disclosed key information about its retail investment properties.
The 3 alleged retail REITS sport great occupancy rates at 98%-100%.
All three malls have also received fairly good ratings on Google reviews.
In terms of total revenue and operating income, YTD 2024 results is just a mere bump higher than its pre-pandemic YTD 2019 results.
To give a comparable example, IGBREIT’s (KLSE:5227) 1H’24 revenue is up 13% versus its 1H’19.
Key related party information
For the Bursa veterans, most would be aware that WCT shares the same major shareholder as Malton Berhad (KLSE: MALTON).
Back in 2016, Mr Desmond Lim Siew Choon, the chairman of Malton, surfaced as the largest shareholder of WCT.
Both Malton and WCT are construction and property developers. So far there hasn’t been any news of conflict of interests between the two companies.
But there were rumours of a potential merger in the past, making it a possibility in the future.
What’s the future for Paradigm REIT after IPO?
One crucial factor that sets S-REITs apart from M-REITs is their future growth runway. Be it CapitaLand REITs or Mapletree REITs, these blue-chip Singapore REITs have a relatively clear blueprint on how it will grow, based on rights of first refusal (ROFR) property pipelines from its sponsor.
Even Link REIT (HKG: 0823), which does not have a sponsor, proves that with prudent and driven REIT managers, it can still acquire quality investment properties at accretive DPU basis.
On the flip side, M-REITs or property developers in Malaysia seem to find it hard to follow this blueprint successfully.
For instance, IGBREIT has only held 2 retail malls since its IPO till now. Pavilion REIT (KLSE: PAVREIT) has underwent acquisitions but I would err on the side in terms of accretiveness.
With only 1 retail property left in WCT’s portfolio post Paradigm REIT’s IPO, what’s next for the 5-10 years?
Will the hotel and hospitality assets be injected? Will it be accretive?
Also, in the event WCT and Malton does merge in the future, would PAVREIT compete with Paradigm REIT for rights of first refusal, given that Malton is the sponsor for PAVREIT?
Quality over Quantity
Yes I know that more M-REITs mean more choices, but that doesn’t necessarily translate to better quality.
I know I might be jumping the gun by implying that Paradigm REIT won’t be a great REIT. The IPO prospectus, once released, would shed more light on its quality and valuation.
But let’s be honest, there are more and more malls sprouting up all around Klang Valley. And with jams becoming the Malaysia’s daily staple diet, do we really need more malls?
Again, I am not questioning the value of Paradigm’s malls. I think the Paradigm malls are great urban malls that play a vital role in servicing the community around the area.
I am however, taking a jab at the newer malls. Malls are not like your internet browsers, where you can have multiple tabs open at a time. And we can only be at one mall at a time. That means, more malls will pull foot traffic and tenant sales from the older malls.
That would play into the challenges of Paradigm malls and other existing malls’ growth.
To explain plainly, you can’t have everyone voting TRX mall as the best mall to go to every weekend, yet be a shareholder of PAVREIT or Paradigm REIT and expect results to go up without fundamentals.
That explains why I prefer to shop for S-REITs on SGX, but do my actual shopping at retail M-REITs.