UOA REIT currently owns five commercial properties in Kuala Lumpur. In terms of total shareholder performance, it is one of the top 5 Malaysian REITs that made you money if you invested from their IPOs.
I wondered how UOA REIT would fare amidst the increasing office supply in Kuala Lumpur with an additional 2.8 million square feet of commercial space from the Exchange 106 at the Tun Razak Exchange, 1.7 million square feet from Merdeka PNB 118 in the pipeline and more from the upcoming Bukit Bintang City Centre project.
Here are seven things I learned from the 2019 UOA REIT AGM:
1. Profit after tax increased 51.7% from RM37.9 million in 2017 to RM57.5 million in 2018. But if we take a closer look, this comprised an unrealised fair value gain of RM22.5 million from investment properties. Realised profit after tax actually slipped 7.9% year-on-year from RM38.0 million in 2017 to RM35.0 million in 2018.
2. Wisma UOA Pantai was disposed in July 2018 when its occupancy rate stood at approximately 19%. As a result, the disposal brought down total gross rental income by 4.6% from RM82.0 million in 2017 to RM78.2 million in 2018. The net sales proceeds of approximately RM118 million was used to reduce existing bank borrowings and gearing ratio was reduced from 34% in 2017 to 26% in 2018.
3. Overall occupancy rate improved in 2018 to 90.5% and the outlook in 2019 is anticipated to be better. The weighted average lease expiry of UOA REIT is at 1.5 years from over 300 tenants.
4. According to CEO Kong Sze Choon, UOA REIT will consider talking to its sponsor, UOA Group to inject UOA Business Park into the REIT in the future. UOA Business Park is an MSC Malaysia Cybercentre located in Shah Alam, Selangor and accessible via the LRT Kelana Jaya Line and Port Klang KTM Line at Subang Jaya rail station. Some empty shoplots at the business park were sold to individual owners, but the office lots have been well taken up by tenants including Canon Malaysia. The CEO added that a property needs to be at least 70% occupied and yield accretive to be considered for acquisition.
5. Kong aims to increase the occupancy rate at UOA Centre Parcels and UOA II Parcels from about 85% in 2018 to 90% in the near future through a number of asset enhancement initiatives. Discussions are ongoing with KLCCP Stapled Group and Kuala Lumpur City Hall to create a direct link from the buildings to the pedestrian bridge that connects Pavilion Kuala Lumpur Mall and Kuala Lumpur Convention Centre to improve connectivity. The link will cost approximately RM700,000. UOA REIT is also working with a co-working space tenant to make the buildings more tech-friendly in order to appeal to the younger generations.
6. UOA REIT is talking to Mass Rapid Transit Corporation Sdn Bhd to build a covered walkway from UOA Damansara Parcels to MRT Semantan Station that will cost about RM300,000. In addition, replacement of air-conditioning chillers in UOA Damansara II was completed in 2019, thereby achieving 40% in electricity savings. The savings is equivalent to 30 sen per square feet per month.
7. A unitholder was interested to know more about the business relationship between UOA REIT and UOA Group. When the REIT was first listed, there was an arrangement that UOA Group is obligated to give UOA REIT the right of first refusal for any buildings that they intend to sell. This obligation was renewed recently and will expire in 2021.
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Klang Valley office space demand will increasingly be a “tenants’ market” as huge supply of incoming new office spaces are expected from 2019 to 2022.
The challenge for older office buildings in Klang Valley is to retain their existing tenant with a single digit increase in rental as there are many choices out there for these existing tenants to move out to. Many older buildings are suffering from low occupancy rates after their existing tenants didn’t renew their tenancies due to better offer elsewhere. For example Sunway Tower in the KL City Centre with close proximity to the Petronas Twin Tower are only 22% occupied as at 3o June 2018. This building is owned by the SUNWAY REIT which owns the popular Sunway Pyramid Shopping Mall in Sunway City, PJ.
In summary, Malaysian REITs with high percentage of office properties will find it difficult to main their earnings as most of the top office REITS’ office and commercial properties are already at high 90%+ occupancy levels. This is shown in the results of other office REITs such as MRCB Quill REIT and Tower REIT with the exception KLCC Staple REIT due to their unique arrangement with Petronas.
Great insights as well. Thanks for sharing!