Airport REIT proposal to monetise assets but complexities loom


The proposed airport real estate investment trust (REIT) would allow the government to monetise its infrastructure assets, but challenges remain due to the operating arrangements and capital expansion limit under such trust.

Malaysian REIT Managers Association (MRMA) chairman Datuk Jeffrey Ng said the proposed airport REIT is “indeed a powerful way” to monetise state-owned assets.

“We are confident that with the right pricing and valuation, the airport REIT initial public offering will garner strong interest from both institutional and retail investors as the REIT is supported by high-quality government-backed assets,” he said in a statement yesterday.

The REIT could unlock the country’s aviation infrastructure value, creating a sustainable structure to fund airports’ capital expenditure and expansion.

“Imputing a certain leverage level, the property value for the REIT is estimated to be just below RM20 billion that is to be injected into the proposed REIT.

“This may position the REIT as one of the largest REITs in Malaysia and simultaneously boost the combined property value of Malaysian REITs by 35% to above RM70 billion,” MRMA said in a statement.

The airport REIT, proposed during the recent budget presentation, would allow the government to cash in about RM4 billion by selling a 30% stake in the asset to private institutional investors.

Similar to other REITs, investors gain return from the rental or user fees collected from Malaysia Airports Holdings Bhd (MAHB).

The government owns the airports in the country including the land title. MAHB is given the rights to operate and manage the airports until 2035. The airport operator
pays 12.5% of its revenue to the government.

Meanwhile, JPMorgan Securities (M) Sdn Bhd said the proposed airport REIT will materialise after the completion of the new Regulated Asset Base (RAB) framework and user fees structure.

“Returns under the new RAB framework would have been locked in for the next three years, once negotiated upon and implemented by the second half of 2019.

“The risk here is if the government prefers MAHB to adopt an asset light model, then it may provide upside cap to RAB-based returns, which are supposed to link capital investments to the level of charges,” the research firm said.

Under Malaysia REIT requirement, there is a 15% cap on development capital expenditure (capex) as percentage of total assets. This may result in a limited capacity to fund new airport developments.

“Ultimately, the burden on capex may still be shared. Even on asset light model, under the operating agreement (OA), MAHB’s regulated return based on Consumer Price Index will still take precedence with compensation via the marginal cost support passenger service charges in the event of shortfall,” JPMorgan said.

Bloomberg Intelligence said the proposed airport REIT could dampen MAHB’s growth prospects.

“This may undermine MAHB’s long-term growth potential, with greater competition for attractive airport investment opportunities from the REIT, we believe.

“MAHB may also be pressured to pay a bigger cut of its revenue to the government and the REIT for its concession,” it said in a recent report.

But Maybank Investment Bank Bhd (Maybank IB) does not expect negative impacts from the airport REIT on MAHB, as the airport operator is safeguarded under the OA inked with the government.

“The government has never reneged on the OA and there’s no reason to think it will do so now. The government’s intention is to monetise its assets and use the proceeds for needy airports.

“There are many ways, apart from this REIT structure, to meet the objective,” it said in a research note.

The research firm said the new REIT company would be an added layer between the government and MAHB. There is also the question of the assets to be injected into the REIT company.

“This is to derive an equivalent asset value of RM4 billion (for the 30% stake to be sold) and later listed on Bursa Malaysia (presumably).

“The REIT company will get rental income, either directly from MAHB via the revenue share mechanism, or the government pays out the revenue share it receives into the REIT company,” it said.

Maybank IB expects MAHB to pay some RM424 million to the government for its revenue share mechanism this year. It paid the government RM392 million last year.

“This structure, however, is not without its share of complexities. Airports are in constant need of maintenance capex. Most airports will reach their design capacity over a 10-year cycle and require major capacity expansion,” Maybank IB said.

But the move could set a benchmark for other similar initiatives as the government has said other projects including hospitals and rail infrastructure could benefit from similar funding and investment structures.

MAHB shares closed seven sen higher at RM8.10 yesterday, valuing the group at RM13.43 billion.

The stock has recovered somewhat since last Monday, when it fell 8% — the biggest full-day drop since February 2016 — as investors reacted to the proposed airport REIT.

Since Jan 2, the stock has fallen 7.59%, while the FTSE Bursa Malaysia KLCI has lost 0.41%.