How has Axis REIT performed since listing in 2005?
LABROOY: We were the first REIT to list in Malaysia back in August 2005. Prior to listing we were, as an organization, an investment holding company that decided to move our business model from the private to the public space. We were operating like a private REIT, so we had all the necessary financial and property management structures in place. Therefore, when we migrated across to the public domain it was a very simple process for us. What we did at listing was to float a large portion of our debt as equity into the market and went on from that point. We started off with only 5 properties; we were very small when we listed. We had only $100m worth of assets. Since 2005 we have grown to 29 properties under management with a value of $483m. We hope to cross the $500 m mark this year. For 7 years the REIT has provided investors with solid growth, irrespective of the global financial crisis (GFC), which came in 2008 just 3 years after we listed. We've actually provided our unit holders with a growing distribution of dividends from the time we listed until today. We started off at an IPO share price of $0.40. We're now trading at $0.90 and if you look at the numbers, the total return for our stock since listing has been 207%. Over the 6-year period, it's averaging above 20% per year. We had a dip in unit price as a result of the GFC but we came back very strongly. Once we entered the market we bought very well in the early years because property prices were still fairly depressed coming out of the Asian financial crisis and we were able to get some very good deals. Similarly, after the GFC, we were still able to secure some excellent acquisitions. Recently, it has gotten slightly more difficult because markets have become very active and prices have gone up. Additionally, there's been a large yield compression in the REIT market in Malaysia. In addition to managing Axis-REIT, I am also the Chairman of the Malaysian REIT Managers Association, which is a byproduct of the fact that we are a new asset class in the market. We have all the 15 REIT managers as our members today and we basically work on a spirit of cooperation among ourselves. We have our own conferences, seminars, and training programs for our people to further develop the industry because it's still very new. Even today many retail investors don't understand REITs, but we feel that is about to change.
Is the current valuation of Axis REIT fair?
LABROOY: We're currently trading at a yield of 6.0%, at $0.90. People often ask me if it is a good time to buy our units and I always respond by saying that it's never a bad time to buy because we're always on a growth strategy and we look at accelerating our fund on an annualized basis. By moving our dividend yields up we tend to move the share price up with it. Therefore, wherever you get on the curve, you're not going to do too badly. We're very dedicated to our unit holders and our shareholders. We have a very strong charter as a manager to ensure that our shareholders' interests come first.
What are some of your goals for the upcoming years ahead?
LABROOY: Our first big challenge was passing the RM 1bn ($316m) asset mark which we achieved last year. Today our assets under management stand at RM 1.45bn ($483m). As a result, our market capitalization now stands at RM 1.25bn and we are very happy to say that we've been invited to belong to the 1 billion Ringgit club in Malaysia. That's a big start for us. Moving forward, we are looking at expanding the size of the REIT to a much higher level. Our next target will be RM 2bn ($667m). We're now at RM 1.45bn ($483m). We’re planning to get there by the end of next year. Apart from that, we're looking at strategies to develop our own private equity side of the business, which is outside the REIT, in order to develop assets for injection into the REIT and create a pipeline. We’re looking at top-end, grade A, industrial assets with green features. I think that’s going to be the trend of the market. We're trying to build products for future markets as we look at adding assets into our portfolio. In addition we look at properties which in our opinion are horribly undervalued or under-rented; we buy them and then enhance them and put them back into the market. We get spectacular results from doing this, both in terms of rental as well as valuation.
In what ways has the Global Financial Crisis impacted Axis- REIT?
LABROOY: In 2008, before Lehman crashed, we had a strong feeling that something was amiss with the capital markets. In fact, a year prior to the GFC we had taken steps to move ourselves from being a conventional REIT to a Shariah (Islamic) REIT. We did this primarily because we wanted a much larger and diverse investor base if the West went into a distressed situation. We could still find investors from the Middle East who wanted to put their money in Islamic products. The strategy worked out very well for us. As everyone crashed in January of 2008, the entire world took a huge nosedive. Our share price also went very sharply down, but we recovered our share price within 6 months. We were back to a point where we were above our NAV trading level and we started raising money again in the market. We were able to recover very quickly primarily because we had a very strong banking sector in Malaysia, and the Malaysian regulator refused to allow many of those toxic derivatives to be traded in Malaysia. Additionally, in Asia we have a very strong banking sector and the Southeast Asian banks had learnt their lessons from the Asian financial crisis since 1998. Therefore, we were well prepared to take the hit. The banks had no trouble refinancing debt. This was a big problem globally with REITs. Many REITs had to use very dilutive strategies to raise capital, through rights issues and asset sales, and I think many of them have not recovered on a share price basis. We bounced back within 6 months and we moved ahead from there. Since then we've been seeing our share price improve on a year-to-year basis. I think much of it has to do with the fact that Malaysian REITs are small as an industry. Further, the institutional investors who form the bulk of the investors in Malaysian REITs hold on to their stocks very tightly because they wanted to retain income-generating stocks for their portfolios. The pension funds and the insurance companies are largely our investors and they basically buy and hold. They're not really trading that much.
In Malaysia, REIT transactions account for approximately 11% of the total market cap. In North America and in other Asian nations, upwards of 60% of market cap is represented by REIT transactions. Where do you see this going? Are you looking to grow or capture more of the overall market?
LABROOY: The issue here is not so much trying to capture or grow. It's a question of actually building your business on sound economic principles. Growing for the sake of growing is probably the worst strategy you can take. You tend to make bad decisions; you tend to buy expensive and then when things turn against you, you have an issue trying to keep your share price intact for your shareholders. We are continuing to grow year on year and all the MREITs in the association, whom we talk to very often, all have a growth strategy. The majority of them are trading above their net asset values. They're raising non-dilutive capital in the market and they're going very actively back into the market to buy. What's not helping us at this point in time is that assets are getting quite expensive and there's been a huge yield compression that is difficult to come to terms with.
What do you make of predictions of an oversupply of retail and office properties within Malaysia? How will this impact the performance of MREITs?
LABROOY: If you look at retail, it is very much location driven. The assets in the REITs are very high-end; Pavilion and Sunway Pyramid are examples of very successful malls. They're building on that reputation. Whatever they put into the market, they have the expertise to do well. It is the smaller players that try and enter this retail market that get themselves badly hurt because of a lack of expertise. There are examples of a number of malls that were launched a few years ago and failed because the retail space was sold off on a strata basis and there was no management; they are all basically empty now with no one to lead them. Therefore, I think it's how you approach the retail market. It requires a very high level of expertise.
Indeed there are many malls coming up. However, the appetite of Malaysians for malls doesn't seem to abate much at all. There seems to be a real mall culture in this country and mall operators do very well out of it. However good sites are difficult to come by, which restricts supply. If a developer takes a chance by going outside to the fringes to setup something and if you don’t approach this in the proper manner, they could fail miserably. With regards to the office sector, I think there's been speculative building in the market, which is going to actually dampen that sector quite badly. Fortunately we don't have a large portfolio of office in our trust; it's only about 15% and it's declining as we add more industrial products to the portfolio. What we do have is very much grouped around the main LRT stations. The connectivity of these particular products is very good in terms of getting clients to come in and therefore we don't have an issue renting our spaces out. In that respect we're fairly cushioned and quite lucky that we actually did buy well and build well. Apart from that I think some of the offices that are being built will be under a lot of stress to fill space because it'll take a while to absorb the space that is coming on the market.
What are the primary differences in the structure of a Shariah compliant REIT and a conventional REIT?
LABROOY: It's not rocket science. It's quite simple actually. When Malaysia wrote the Islamic REIT rules, we were the only country in the world that had them and that remains true today. In other countries like Singapore, maintaining Shariah compliance is the norm where they follow codes established outside the local regulations, but there are no regulated guidelines on it. It's basically a self-imposed guideline structure that gets a certification. However, in Malaysia we're actually guided by the Securities Commission and we have a set of guidelines that we have to follow. The only difference between a conventional REIT and a Shariah REIT is basically that we have to engage a Shariah adviser to advise us on the assets that we buy and the tenants that we engage. We can't have tenants that are involved with gambling, the sale of tobacco, or the sale of non-halal products. Even conventional banking is not considered acceptable under these guidelines. Islamic banks and Islamic insurance companies are welcome to take part as a tenant role. Apart from that, all of our financing must be Shariah. Of course with Malaysia being the leader in Islamic finance, this has never been an issue for us. In fact, we have no issue raising Islamic capital for debt financing. We are currently in the process of launching our first sukuk into the market this month. We're looking forward to seeing the response to that as well. Lastly, we must ensure that we have insurance that is Islamic, which is known as takaful. Those are the 3 main things that we have to do in order to qualify for the status. By doing so, we widen our appeal for the investor base. Everyone can buy us, but not everyone can buy conventional REITs. By doing this, we opened up our offerings into the market. As a result we place out every year when we raise capital into the market. We also have a very strong demand from the Shariah side as well.
Has the interest from the Middle East been what you had anticipated when you started offering Shariah compliant REITs?
LABROOY: It wasn't exactly as we had anticipated. The problem here is that we are the only Islamic country that actually has an Islamic REIT structure. The only other Islamic country to have REIT regulations, although those are non-Islamic, is Turkey. The rest of the Middle East does not have REIT structures in place. They're currently looking at it but the REIT structure is not well understood in those countries. The other problem we have is that our REIT is not that large and our liquidity is not that high. The local Islamic funds absorb everything that we can offer to the market. Therefore, we don't actively promote the stock outside the country. Although recently we've been having a great deal of interest coming out of the Singapore funds that are seriously looking at us and trying to buy into positions as well.
Malaysian REITs are very conservatively geared and continue to be so. For a $5.37bn industry, it's averaging a leverage of about 25-35%, which is very low. In fact, leverage is low across the property sector.
How has the MREIT market changed since its inception? How will the entrance of IGB REIT impact the market?
LABROOY: Recently we have had an inflection point in MREITs in Malaysia. For a while we were very small and international investors considered us too small and illiquid to bother about. Then suddenly we had Sunway, Capital Mall, and Pavilion list, and all 3 of them combined were nearly $4bn in size. They moved the market capitalization of MREITs to $5.37bn and it was only then that international investors started looking seriously at Malaysian REITs because suddenly there was liquidity and depth. Its nowhere near the size of Singapore REITs, but we're getting there. The entrance of IGB REIT into the market is going to add another $1.25–$1.6bn on top this of that so we're going to reach $7-8bn in market cap. Notwithstanding the fact that all the REITs themselves are growing and adding to stocks; so that's going to be about $10bn in a very short space of time. As we grow we will soon be on par with Hong Kong. Only then I think people will start looking at us more seriously. IGB REIT will be a very welcome addition because again it adds more excitement to the REIT market and brings a great deal more liquidity to the trades and that's what we're looking forward to.
According to the Prime Minister’s Economic Plan for 2012, property development growth is expected to be greater than overall GDP growth at upwards of 6%. Do you see this as an accurate assessment? What is driving these predictions?
LABROOY: I think the values of the trades are getting higher. I think what the Prime Minister is looking at is the large interest that's being generated both in the South in Johor, where the number of transactions is skyrocketing, and in Penang. There's a great deal of interest and people are coming back into the Penang market. These two regions are really driving the property sector. The Klang Valley is not so much driving the sector any longer. The entire Iskandar project, and the cooperation with Singapore on that side, is what is driving this forecast as well as a great deal of investment coming into Penang. In Penang, they're releasing more land in the Batu Kawan area for industries. Many people are committing to very large plants to move in there. It's very much a strong FDI type development based figure that's boosting the property side to a large extent.
Would you say it's more the FDI than government spending that’s currently driving growth?
LABROOY: I would say it’s a bit of both. Then again, when you look at the effect of the LRT that's coming through, that's going to generate a great deal of peripheral business for the property developers around those stations. There's going to be a large amount of activity that's going to generate its own KPI in terms of generating growth in the property sector. There are many elements coming in. Many of them are government funded to a certain extent. Iskandar is a government-funded project that's now coming into fruition. We went to Johor Bahru in 2006; everyone thought we were crazy. However, we saw the potential of Iskandar very early on and started buying assets in Johor. I was a big fan of the whole area because I reckoned that once it was completed, investors would come, and they have come. There's a large amount of interest now in Johor not only from the Singaporeans but also from Malaysian developers going there to setup and build facilities for the region.
What lessons has Asia learned from the GFC?
LABROOY: Malaysian REITs are very conservatively geared and continue to be so. For a $5.37bn industry, it's averaging a leverage of about 25-35%, which is very low. In fact, leverage is low across the property sector. Many of the property counters are also well funded and they have support in terms of financial backing by both the investors as well as the banks. They have long-term sustainable projects, which seem to be doing very well. The speculative element has largely left the market. It's always creeping back in of course when euphoria starts to set in, which I don't understand because I look at Europe as a very scary thing and no one seems to be dealing with it. It can come and bite us at any time. I think Asia's got its own buzz right now. It has a very strong financial system, high savings rates, hardworking people, and I think that it's going to generate its own economic union, which is already happening within ASEAN. Cooperation with China and Japan is also expanding. Australia is playing a very big part in that whole equation as well. Asia is getting its own act together and there's tremendous cooperation among governments. Governments are liberalizing. Indonesia is also doing well and when they do well, Singapore does well. There's this huge ‘knock-on’ effect that goes on with all these countries because everyone works very closely. The countries are very closely linked in many areas. The ‘hot money’ flow so to speak has largely abated quite a bit in the ASEAN region but we’re seeing a bit coming in now because of these large IPOs that are being listed in Malaysia. Strangely enough, we seem to be the only country that actually has successful IPOs right now. In Singapore, everything is off the table and Hong Kong has stopped altogether. Everyone seems to be stopping IPOs except us. For some reason we're now the darlings of the IPO market.
What makes Axis REIT different than other REITs?
LABROOY: As a company, I think we are slightly different. We're not a developer-based company. We're an investment holding company that went to market. The people that run it are very much entrepreneurial in character. We believe in buying well and rewarding shareholders. We have a philosophy where we sell assets and return the capital gain back to shareholders. We don't put it back into the business because we think anyone that joins our business should benefit from trades as well as from acquisitions and deals. We're also very focused on asset shareholder return. That's one of the big things we do. Also, internally, we manage everything from top to bottom. We're fully integrated as an organization. We manage our assets and our tenancies. We have our own people on the ground in our buildings and we know our tenants personally. Every tenant has my mobile number and if they're upset they'll call me. We try and get personalized service to them. We work almost like a service industry with the fund adjunct on to it because we believe our tenants are our value chain, which we have to protect and look after very well. By doing that, I think we've been quite successful in terms of returns.