An open cryptic feedback for SC’s REIT proposals

Real estate investment trusts (REITs) are I think beautiful creations that allow us to invest in property without coughing out vast sums of money and the headache of looking for tenants, fixing broken pipes, etc. The structure is elegant: you give the REIT money, the REIT manager invests it on your behalf, takes a fee and passes the rental income to you. Buying into a REIT fund (as opposed to just one REIT) super-charges your diversification. Most people who have just enough money to buy a few properties for investing have to pray that not one they own flops to avoid a big hit on their wealth. Buying a REIT fund gets around that by opening up your world to hotels, malls, industrial properties, offices and even residential real estate.

What the Securities Commission now proposes, egged on by the Malaysian REIT Managers Association (MRMA), is to allow REITs to, among other things, use 15% of their assets for development work (the current limit is 10%) and buy vacant land for future developmental purposes. You may peruse the full proposals here, but they mostly boil down to giving REIT managers more discretion in how they manage your money.  The 5% points bump may seem small but let’s hope it’s not the start of surreptitiously turning REITs to quasi-development projects.

When I spoke to representatives of the MRMA, they asked us to trust your managers because they won’t intentionally put duds into REITs. The question is how we can move from a form of faith-based investing to institutionalised trust. What measures can the SC put in place to not only inform investors that they are not only taking extra, possibly unintended, risks from the new developmental elements but also avoid the danger of permanently killing off a pure rental-based asset class?

The SC is seeking public feedback till 13 Sep 2016 which you can provide here. I, on the other hand, prefer to use this site to provide an open feedback to the SC, the MRMA and investors in general in the form of a cryptic story because… well because I can, and I hope it helps in some way, in the way some cryptic stories can.

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You want to eat soup.
To eat soup, you need ingredients.
You get ingredients.
Instead of making it yourself, you ask a chef to do it, because they do it better.
The chef makes good soup and you pay him soup-making fees (well worth it for a great chef making good soup).
You invite your friends and family to eat soup.
After eating the soup a little, the chef proposes to add chillis to the soup.
Why? You ask.
It makes the soup even better, says the chef.
People around the table look at each other. Some want chilli; others don’t.
Also, the chef says, he wants to buy fresh ingredients for you and wants you to give up some soup in the meantime.
Why? You ask.
Because I need to get more soup going, the chef says.
Like right now? You ask.
No, says the chef, sometime in the future.
You scratch your head and tell the chef you don’t want chillis in your soup.
You say you don’t want to give up some soup for more soup in the future because you’re hungry now.
You say you don’t want to owe him for buying fresh ingredients now.
The chef is not pleased as he’s a great chef.
Don’t you trust me? The chef asks.
It’s not that, I just want to eat soup my way, when I want to, you tell the great chef.

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