IntroductionIn26th October 2017, Bursa Malaysia has announced the newly launchedReal Estate Investment Trust (REIT) Index by Bursa Malaysia Berhad chiefexecutive, Datuk Seri Tajuddin Atan. He also said that the index will giveinvestors better access and clearer view of Malaysian REITs’ performance —which has outperformed both benchmark KLCI and Property Index over the pastthree years by 15% and 26% respectively. Tajuddin also did disclosed that this Indexwill ultimately improve the depth and breadth as well as liquidity of REITs inMalaysia, for future developments of by-products such as ETFs (Adam Aziz, 2017).Accordingto ARES Japan Property Index, a property index is a real estate investmentperformance index, and generally shows the investment return in a certaininvestment period. The Index is used as a reference when making decisionsconcerning investing in real estate, as well as serves as an index to measureand evaluate the investment result. (ARES Japan Property Index, 2017). Certainly, the Index is comprised of threeelements which are the income return from rental income, the capital returnfrom changes in real estate value, and the total return of the two.Purposeof Property IndexPopularly,there are three main advantages of the Index (ARES Japan Property Index, 2017).
First, the Index can be used to seize the trend of the real estate investmentmarket. Next, it could assist investors plan asset allocation and investmentstrategy more effectively by quantitatively estimating volatility and yieldcharacteristics. Third, it might be used as a “Benchmark Index” to estimateinvestment results and assess the performance of fund managers. Other than thethree advantages, the Index could measures the diversification characteristicof the portfolio.
Dissimilarityof Index from market price indicatorsTheREIT Index is categorise as the performance indicator and calculated fromincome and capital appreciation gained in a certain investment period. Itdemonstrates the performance of real estate investment in the period. On the contrary,there are other indices like price index and rent index in the real estatemarket. However, these indices are classified as price indicator based on themarket price, and different from the REIT Index.
Dissimilarityof Index from securities indicesInthe case of securities investment including stocks and bonds, a group ofsecurities (called a universe) that can be available for investment from theperspective of liquidity is designated, and the indicator compiled from theaverage return of the universe serves as the index. Investors decide on theasset allocation after considering a combination of the expected return and volatilitybased on the index. Investors’ performance is measured by the relativeassessment of the index.Contraryto that, in the case of real estate investment, real estate cannot be transactedin the same way as is the case with securities products and it’s not regularlytraded. Therefore, in the real estate investment, it is impossible forinvestors to construct the same portfolio as the designated composite of theuniverse as securities investment. PropertyIndexPropertyIndex is the index measured from the universe of income-producing propertiesowned by core real estate funds mainly for institutional investors (ARES Japan Property Index, 2017).
Property index is a weighted-average index calculated by actual NOI data fromoperating activities and capital appreciation data based on changes in theexternal appraisal value.Source: ARES Japan Property Index 2017 Capitalappreciation = The end of market value – The beginning of market value PropertyIndex is the performance index measured from weighted average income returnsand capital returns which are provided from unlisted private funds’ data and listedREITs’ data.Asfor J-REITs, according to ARES, their REITs can be classified as “plaincore fund” and included in the Fund Index, as they are different fromREITs in other countries. J-REITs’ activities are regulatory restricted to berental businesses for the long-term investment. Besides, J-REITs discloseactual NOI and external appraisal value by property twice a year.
In addition, J-REITs’loan to value ratio generally remains low.Onthe contrary, Malaysia REITs (M-REITs) has just begun implementing index inREITS. According to Bursa Malaysia chief executive, he said that the new REITsIndex will attract more real estate players to enter the capital market, hesaid, pointing to alternative REITs in the US, some of which with widerportfolios including exposure inchildcare or renewable energy (Adam Aziz, 2017). Types of Property IndexTherefore,there are many ways to determine the Index of property. The first one isMonthly Index, next is Quarterly Return, Annual Return, Average Occupancy Rate,and the last one is Average Monthly Rent. The performance index is calculatedbased on the formula, taking into consideration the newly listed REITs will beeligible for inclusion into the index three months after their initial publicoffering date (Mahalingam, 2017).1.
MonthlyIndexTheformulas for this index are:Present month’s index = previous month’sindex x (1 + present month’s monthly return)Property Index total return = PropertyIndex income return + Property Index capital return This monthly index is based on the”NCREIF Property Index” in the US in terms of calculation method andthe index is Beginning Market Value-weighted average monthly return of theproperties (REIT Indexes, 2017).Theproperty index consists of three sets of figures. The first one is incomeindex, calculated using monthly income return; the second one is the capitalindex, calculated using monthly capital return; and the third one is the totalindex figure calculated using monthly total return.2. QuarterlyReturnThequarterly return is calculated based on a rate of change in property Index perquarter. The formula of this return is:PropertyIndex at the Present Quarter Ended – 1 x 100 (%)PropertyIndex at the Previous Quarter EndedTheProperty Index for Quarterly Return consists of Property Index Quarterly IncomeReturn, Quarterly Capital Return, and Quarterly Total Return, each of which ispresented as the non-annualized return for the relevant quarter.Amongof these three Property Index quarterly return indices, Property Index quarterlyincome return and Property Index quarterly capital return are calculated torepresent the quarterly rate of change in the Property Index. Meanwhile, PropertyIndex quarterly total return is explained as the sum of Property Indexquarterly income return and AJPI quarterly capital return.
3. AnnualReturnTheannual return is derived from the rate of change in the Property Index perquarter. The formula is as follow:Presentmonth’s Property Index – 1 x 100 (%)Year-agomonth’s Property IndexThe AJPI annual return consists of AJPIquarterly income return, AJPI quarterly capital return, and AJPI quarterlytotal return.AJPI annual income return and AJPIannual capital return are calculated to represent the quarterly rate of changein the AJPI. Meanwhile, AJPI annual total return is defined as the sum of AJPIannual income return and AJPI annual capital return 4.
Average Occupancy RateTo find the average occupancy rate, theformula is as follows:Total leased area x 100(%)Total leasable areaIn regards to the real estate owned by therespective funds, monthly data gained when assuming the simple average data atthe end of the previous year and at the end of the current year are to becontinued every month during the current fiscal period and then calculate themonthly data by taking the weighted average using the leasable area ofindividually owned real estate for each month (denominator).5. Average Monthly RentThe average of monthlyrent is defined from the amount of rent paid per sq meter. The average can becalculated through:Gross rental income from leasing businessTotal leased area Inrespect to the real estate owned by each J-REIT, the index value, calculatedusing the actual value of the income from the leasing business in the current yearand the total leased area at the end of the current year, is assumed to bemaintained each month during the current year. Based on this, monthly dataconsisting of the weighted average on the basis of the total leased area of theindividually owned real estate for each month is calculated.Italso need to be taken into consideration that half-year data is converted intomonthly data. Provided that the rent is calculated as the amountincluding common expenses. In addition, income from parking lots, etc.
isincluded in the case of same properties. Please note that, since the ratio ofincome from parking lots, etc. to income from leasing is 2-4%, this indexcalculated on the basis of numerical values including such also has afluctuation band of about 2-4%. Dispute in the Construction ofProperty IndexThereare some issues arise in the construction of Property Index as the result ofthe characteristic of property and property market. According to (Ball, Lizieri, & MacGregor, 1998),the issues identified is defining the property market, property index representsolely offices, shops and industrials which represent only 15% of the propertystock. Secondly, how are these property types be given weight? Is it based onequal weightings or weight them by market value? In addition, the differentsample selections are used in the construction of different indices resultingin different series that have different index values.Furthermore,the size of sample also influences the property specific risk contained in thesample.
The larger the sample, the greater the diversification but more costsinvolved. Thus the sample size is a trade-off between accuracy and the removalof property specific risk on one hand and the cost and availability of data onthe other. Moreover, the lack of a central trading market on property priceinfo also causing difficulties tocompare the prices of a sample of prop on a regular or frequent basis. Besides,the lack of price information on commercial property is due to tradedinfrequently and with little info on finer details of the transactions. Thus, itis not possible to construct transaction based indices for commercial propinstead have to be appraisal based.Thesixth one is the depreciation of property is handled differently by differentindices. Jones Lang La Salle reflectsdepreciation and refurbishment costs in their quarterly index while HillierParker assume their hypothetical subject prop are all identical and ‘new’ withno depreciation (JLL, 2017) (Hillier Parker, 1998)Lastbut not lease, arise issue regarding construction of property index is the smoothingof property indices.
Appraisal based indices for commercial properties are basedon valuations. Therefore, this can result in smoothing with the volatility ofthe indices being lower than actual market values. In simpler words, the true volatilityis much higher for the de-smoothed indices.
Thus, it tends to be worse formonthly & quarterly series than annual series. ConclusionAsBursa Malaysia has announce the implementation of REITs Index, this can be anew beginning for our local REITs to improve, diversify and offer investor awider opportunity in assessing their investment. It is a need for M-REITs tofollow NAREIT, A-REITs and J-REITs footsteps in order to attract investors andprovide such facilities to ease the decision making for investors. It’s beenreported that ss at Sept 30, 2017, the market capitalisation for REITs stood atRM44bil compared with just RM5bil in 2007 (Mahalingam, 2017).
This shows that there are potential andopportunity for local REITs to boom.