PP 7767/09/2010(025354)

14 September 2010

Malaysia
RHB Research
Corporate Highlights Institute Sdn Bhd
A member of the
RHB Banking Group
Company No: 233327 -M

Se cto r Updat e
14 September 2010
MARKET DATELINE

Property - M-REITs Recom : Overweight

(Maintained)
The Wish List For The 2011 Budget

Table 1 : REIT Sector Valuations

EPS growth DPU growth
Company FYE Price FV (%) PER (x) (%) GDY (%) Gearing Rec
(RM/s) (RM/s) FY10 FY11 FY10 FY11 FY10 FY11 FY10 FY11 (x)
Axis REIT Dec 2.12 2.67 5.6 12.3 12.7 11.3 5.5 12.3 7.9 8.8 0.34 OP
Quill Capita Dec 1.00 1.23 7.3 4.7 11.2 10.7 6.8 4.7 8.2 8.6 0.35 OP
Sector Avg 6.4 8.5 12.0 11.0 8.0 8.7
* price at 13 Sept 10

♦ MREIT vs regional REIT. Regional REITs, such as SREITs and JREITs, have
always been trading at premium when compared to MREITs, in terms of their
yields as well as P/NAV. While factors such as asset size and liquidity play an
important role in determining valuations, the tax regime and REIT guidelines
imposed by government and authorities in individual countries also affect the
attractiveness of all REITs.
♦ Wish list for the upcoming Budget 2011. The reduction of withholding tax is
always included in the proposal of MREITs for Malaysia’s government consideration
during the annual Budget. Last year, RPGT (Real Property Gain Tax) was re-
imposed, which is mainly intended to curb speculative buying in real properties.
However, no announcement was made for the REIT sector. For the upcoming
Budget 2011, which will be tabled on 15th Oct 2010, we are hopeful that
withholding tax for MREITs could be reduced/removed from the current level of
10% vs 0% in Singapore and Hong Kong. Note that, the withholding tax rate has
not been adjusted since 2008.
♦ Other regulatory issues. Apart from the issue on tax, the Malaysia REIT
Managers Association (MRMA), spearheaded by Axis REIT Manager, would also like
to propose to regulators a further relaxation on REIT guidelines: i) To allow REITs
with asset under management (AUM) under RM2bn to have multiple placements to
grow their market cap. However, rules can be enforced if AUM exceeds RM2bn;
and ii) Faster process for rights issue exercise for REITs taking a cue from
Singapore. This allows MREITs to expand their asset size at a faster pace with
smoother process.
♦ Performance of the new retail REITs. Since the listing of the two
retail/commercial based REITs – Sunway REIT and CapitaMalls Malaysia Trust
(CMMT), the performance of these REITs is generally in line with the performance
of other MREITs. Given the size of both REITs, the resulting higher liquidity is
undoubtedly more attractive to institutional investors. This largely explains the
higher valuations that both Sunway REIT and CMMT attain at a prospective yield of
about 7%, versus MREIT average yield of 8%.
♦ Maintain Overweight on the M-REIT sector. We continue with our positive
view on M-REITs due to: (1) The continuous economic growth, and hence rising
private consumption, industrial and economic activities; (2) Rising young
population profile, which is the key driver of consumption; (3) Higher investibility
of M-REITs following the listing of the two sizeable REITs – Sunway REIT and Loong Kok Wen, CFA
CMMT; and (4) REITs provide a good hedge against rising inflation. (603) 92802237
loong.kok.wen@rhb.com.my

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 14 September 2010

The Wish List

♦ MREIT vs regional REIT. Regional REITs, such as SREITs and JREITs, have always been trading at premium
when compared to MREITs, in terms of yields as well as P/NAV. On average, SREITs and JREITs’ yield of around
7% is a tad lower than MREITs yield of around 8%. Hence, REITs are more attractive in Singapore and Japan.
While factors such as asset size and liquidity play an important role in determining valuations, tax regime and
REIT guidelines imposed by government and authorities in different countries also affect the attractiveness and
investibility of REITs.

Table 2: Regional comparison of REITs in terms of asset size, P/NAV and historical dividend yield
Price (LC) Mkt cap (US$ m) Total Asset (US$ m) P/NAV Div Yield (%)
Japan
Japan Real Estate Investment Corp 749,000 4,356.3 7,577.3 1.1 4.7
Japan Retail Fund Investment Corp 111,400 2,235.9 6,996.8 0.7 6.9
Japan Prime Realty Investment Corp 179,800 1,528.4 4,260.4 0.7 7.3
Orix JREIT 390,000 1,166.7 3,420.8 0.7 7.5
Japan Logistics Fund Inc 643,000 1,126.1 1,448.8 1.1 4.9
Nippon Accommodations Fund Inc 482,500 895.9 2,216.5 0.9 6.1
Jaoan Excellent Inc 406,000 746.0 2,318.9 0.7 7.5
Nippon Commercial Investment Corp 87,900 269.0 3,300.6 0.2 9.6
Japan Hotel and Resort Inc 194,800 244.8 1,060.6 0.4 8.5
Japan Single Residences REIT Inc 122,800 81.9 704.4 0.3 9.0
Total 12,651.2 33,305.1 0.7 7.2

Hong Kong
Sunlight REIT 2.14 430.9 1,280.0 0.8 11.5
Prosperity REIT 1.63 280.9 684.7 0.7 7.9
Total 711.8 1,964.6 0.8 9.7

Singapore
CapitaMall Trust 2.04 4,848.9 5,542.0 1.3 4.9
Fortune 3.81 4,740.7 9,006.3 0.7 7.8
Ascendas REIT 2.29 3,202.5 3,624.3 1.5 7.1
Suntec 1.47 2,023.5 3,859.9 0.8 8.1
Mapletree Logistics Trust 0.855 1,311.4 2,240.0 1.0 7.3
CDL Hospitality Trusts 2.03 1,450.0 1,136.0 1.6 5.5
Starhill Global REIT 0.585 848.6 1,726.4 0.7 6.8
Frasers Centrepoint Trust 1.48 847.8 870.2 1.5 6.2
Parkway Life 1.61 726.6 882.4 1.2 6.0
CapitaRetail China Trust 1.22 568.5 896.7 1.1 6.4
Total 20,568.6 24,242.0 1.1 6.6

Malaysia
Axis REIT 2.12 209.9 292.7 1.2 8.2
Al-Aqar KPJ REIT 1.13 211.4 326.1 1.2 8.2
Al-Hadharah Bousted REIT 1.33 238.9 279.1 1.0 10.0
Amanah Raya REIT 0.90 166.4 241.2 1.2 8.9
AmFirst REIT 1.18 163.2 336.7 0.9 8.9
Atrium REIT 0.985 38.7 58.8 0.9 7.6
Hektar REIT 1.27 131.1 250.6 1.0 8.5
Quill Capita REIT 1.00 125.8 263.8 0.8 7.1
Starhill REIT 0.85 323.1 534.2 0.7 8.3
Tower REIT 1.19 107.6 193.1 0.7 8.6
UOA REIT 1.43 113.4 167.5 1.0 7.7
Sunway REIT 0.93 803.8 1,083.4 1.4 -
CapitaMalls Malaysia Trust 1.05 457.1 704.7 1.0 -
Total 3,090.5 1,878.5 1.0 8.3
Note: MREIT spread over 10yrMGS is 4.68%, and SREIT spread over 10yrSGS is 4.43%.
Source: Bloomberg

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 14 September 2010

♦ Wish list for the upcoming Budget 2011. The reduction of withholding tax is always included in the proposal
of MREITs for Malaysia’s government consideration during the annual Budget, and tax structure has not been
adjusted since 2008. Last year, RPGT was re-imposed, which is mainly intended to curb speculative buying in real
properties. Under the tax regime, a fixed 5% RPGT would be imposed only on properties sold within 5 years of
purchase (or an exemption is given up to RM10k or 10% of the gains, whichever is higher). For the upcoming
Budget 2011 which will be tabled on 15th Oct 2010, we are hopeful that withholding tax for local and foreign
individual MREIT unitholders could be reduced/removed from the current level of 10% vs 0% in Singapore and
Hong Kong. We belive this is a necessary move to attract foreign interest and gradually align MREITs with SREITs.

Table 3: Historical witholding tax rate for MREIT unitholders

Type of Witholding tax rate
unitholders 2010 2009 2008 2007
Resident corporate Nil^ Nil^ Nil^ Nil^
Resident non-corporate 10% 10% 15% 15%
Non-resident individual 10% 10% 15% 15%
Non-resident corporate 25% 25% 26% 25%
Non-resident institutional 10% 10% 20% 20%
^ Resident corporate unitholder will enjoy tax transparency but will be subject to the prevailing corporate tax rate
Source: Axis REIT annual report

Other regulatory issues. Apart from the issue on tax, the Malaysia REIT Managers Association (MRMA),
spearheaded by Axis REIT Manager, would also like to propose to regulators a further relaxation on REIT
guidelines. These include: i) To allow REITs with asset under management (AUM) under RM2bn to have multiple
placements to grow their market capitalisation. However, rules can be enforced if AUM exceeds RM2bn; and ii)
Faster process for rights issue exercise (to fund acquisition of property assets) for REITs taking a cue from
Singapore. This allows MREITs to expand their asset size at a faster pace with smoother process, enhancing the
investibility of MREITs. Currently, the regulatory process and procedures to undertake a rights issue exercise
takes about 6 months, versus only one month in Singapore.
♦ Performance of the new retail REITs. Since the listing of the two retail/commercial based REITs – Sunway
REIT and CapitaMalls Malaysia Trust (CMMT), the performance of these REITs is generally in line with the
performance of other MREITs. Given the size of both REITs, the resulting higher liquidity is undoubtedly more
attractive to institutional investors. This largely explains the higher valuations that both Sunway REIT and CMMT
attain at a (prospective) yield of about 7%, versus MREIT average yield of 8%. However, if we compare Sunway
REIT and CMMT to other Singapore retail-based REITs (such as CapitaMall Trust, Frasers Centrepoint Trust and
CapitaRetail China Trust), valuations attached to both Sunway REIT and CMMT are still relatively lower despite
comparable asset size (please see Table 2 for P/NAV and yield comparison). This, therefore, addresses the need
for further regulatory liberalisation to improve the attractiveness of MREITs.

Chart 1: Relative performance chart of MREITs to KLCI

25%

20%

15%

10%

5%

0%
Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10

-5%

-10%

-15%

AXRB AQAR BIRT AARET ARET ATRM HEKT QUIL STRH TRET UOAR SREIT C MMT

Source: Bloomberg

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 14 September 2010

♦ Risks and concerns. The risks include: (1) Non-renewal of tenancy after expiry; (2) Unfavourable economic
conditions that will cause devaluation of properties; and (3) Substantial interest rate hikes that will affect total
borrowing costs.
♦ Forecasts. Maintained. We value Axis REIT and Quill Capita based on yield benchmark of 7%, pre-crisis level,
and after taking into account the relative market capitalisation and liquidity.
♦ Maintain Overweight on the M-REIT sector. We continue with our positive view on M-REITs due to: (1) The
continuous economic growth, and hence rising private consumption, industrial and economic activities; (2) Rising
young population profile, which is the key driver of consumption; (3) Higher investibility of M-REITs following the
listing of the two sizeable REITs – Sunway REIT and CMMT; and (4) REITs provide a good hedge against rising
inflation.

Technical Viewpoint: Reit Sector Report (14 Sep 2010) – AXReit

Chart 1: AXReit Technical View Point

♦ After hitting a high of RM2.07 in Nov 2009, and as
it failed to sustain at above the resistance level of
RM2.06, AXReit fell on heavy profit-taking
activities.

♦ However, with the help of a support near the UTL 1

at RM1.90, the stock found its footing and regained
its upward momentum.

♦ It started off with a slower uptrend (UTL2) and

regained its buying support, before penetrating the
RM2.06 level in Jul 2010.

♦ Following a decent pullback in Aug, the stock

relaunched a rally in recent sessions to RM2.17
before closing at RM2.12 yesterday.

♦ Given the slow turnover in recent weeks, the stock

could ease on profit-taking pressure in the near
term, due to the muted technical readings, in our
view.

♦ However, we remain confident that the key support

at RM2.06 will buffer selling pressure, and upward
momentum should resume nearer to RM2.06.

♦ Key immediate resistance is at RM2.17, followed by

the RM2.30 all-time high level reached in Aug
2007.

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 14 September 2010

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Stock Ratings

Outperform = The stock return is expected to exceed the FBM KLCI benchmark by greater than five percentage points over the next 6-12 months.

Trading Buy = Short-term positive development on the stock that could lead to a re-rating in the share price and translate into an absolute return of 15% or more
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Industry/Sector Ratings

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