Linkages between capital structure policy and Malaysian real estate investment trusts property portfolio enlargement

Abstract

The superiority of real estate investment trusts (REITs)'tax regime which gives tax waive provided REITs distributed 95 percent of earning to unit holders, had limits its potential to expand in term of its property portfolio enlargement (PPE). This study aims to determine the links between capital structure policy of Malaysian REITs (M-REITs) and PPE agenda. Adopting a descriptive analysis and deployed a ten years data of M-REITs, this study reveals that there is an opposite relationships between debt-to-equity ratio (D/E) and the average increase percentage of property total value (AIPPTV). This study indicates that as D/E grows, there will be a resistance in PPE agenda. This explains the poor size of M-REITs properties total value, which 58 percentage of it is less than RM1 billion. This study suggests M-REITs should plan their PPE financing option as the cost of debt (kd) advantage when lower interest rate imposed. There other factors influence REITs PPE such as the quality and the performance of properties, properties diversification in term of property type, geographical and size, institutional ownership of the property, externally managed managers and issue of cash flow of majority unitholders in REITs.