The proposed assessment rate hike for properties in Kuala Lumpur by the KL City Hall might have a negative impact on REITs with the highest exposure to KL-based properties

Updated: Wednesday November 27, 2013 MYT 7:15:30 AM

Rate hike may hurt REITs

BY EUGENE MAHALINGAM

PETALING JAYA: The proposed assessment rate hike for properties in Kuala Lumpur by the Kuala Lumpur City Hall might have a negative impact on real estate investment trusts (REITs) with the highest exposure to KL-based properties, according to analysts. “We do expect some impact (from the assessment hike) on the earnings of REIT players with properties in KL,” said an analyst from a local bank-backed brokerage.“However, we won’t be surprised if these players end up passing on the costs to tenants,” he added.

CIMB Research analyst Faisal Syed Ahmad concurred, noting that by passing on the costs, the impact on REIT players would be mitigated.

“Although a steep 100% to 300% hike in assessment rates would have a negative impact on the bottomline of Malaysian REITs, we believe most of it would be passed on to their tenants. In fact, there is a common clause in most tenancy agreements stating that any utility or assessment cost increase could be transferred to the tenant.

“Thus, the assessment rate increase would not have a significant impact on the earnings and dividends of REITs,” he said in a report.

Faisal added, however, that the operating environment would become more challenging for REITs, as tenants would soon have to absorb extra costs such as the imminent goods and services tax and potentially higher electricity rates.“If the cost for the tenants to occupy the space is too high, then they might not be able to sustain their businesses and the REITs might not be able to renew their tenancy agreements.”

The hike in assessment rates would have the biggest negative impact on the REITs with the highest exposure to KL properties, namely, Pavilion REIT, IGB REIT andKLCC Property, said Faisal. “The other REITs under our coverage such as Sunway REIT, Axis REIT and CapitaMalls Malaysia Trust would be less affected, as their property locations are more diversified, with only a few assets located in the city centre.”

RHB Research in its note, however, said the affected REITs would be filing their objections to the proposed hike and would be waiting until after Dec 17 (being the last day to submit objection applications) before planning their next move.

“At this point of time, the REITs have yet to indicate whether they would bear the extra cost or fully pass them on to their tenants.”

Currently, the rate for commercial properties is 12%, residential units 6% and vacant property or land 10%.

Set to be implemented next year, the proposed hike has drawn criticism from both city folk and KL Members of Parliament who are outraged with the increase. Following the protests, it was recently reported that the rates could be reduced by between 50% and 70%.