Letter From The Chairman & The CEO

Dear Unitholders,

On behalf of the Board of Directors of Axis REIT Managers Berhad ("ARMB" or "Manager"), it gives us great pleasure to present to you the Annual Report of Axis Real Estate Investment Trust ("Axis-REIT" or "Fund") for the financial year ended 31 December 2017 ("FYE2017").

2017 marked the 12th year of Axis-REIT's listing on Bursa Malaysia Securities Berhad ("Bursa Securities"). At the point of its listing on 3 August 2005, Axis-REIT was the first REIT to be listed on Bursa Securities, and had a stable of five properties with assets totalling RM296.0 million. Today, the Fund boasts a portfolio of 40 properties worth RM2.482 billion, with a total net lettable area ("NLA") of 8,087,781 sq. ft..


The Fund has achieved remarkable growth and attained many "firsts" since its listing. This year's theme, "Transcending Boundaries", encapsulates these achievements in terms of growth, as well as in the realisation of new opportunities and success in new endeavours. As Axis-REIT charts its way forward with expansionary strategies, we remain focused on generating positive investment returns and creating new avenues of growth for the Fund. The athletes on the cover of the Annual Report symbolise these relentless efforts to go higher and beyond.


Despite the cautious sentiment at its outset, 2017 turned out to be a better-than-expected year for the Malaysian economy. The country's gross domestic product ("GDP") grew 5.9% in 2017, driven by resilient growth in domestic demand and strong export growth, amid continued expansion in the global economy.

Current indicators suggest that the Malaysian economy will remain resilient going into 2018, with official forecasts pegging growth at 5.0-5.5% for the year. Risks to the outlook are modest and largely on the external front, and relate to increasing trade protectionism in the US, tighter global financial conditions and volatility in financial markets.


We believe the country's firm economic outlook augurs well for the overall property market, but note that supplydemand dynamics will have a more immediate influence on selected property subsectors. We are cautiously optimistic in our outlook for the industrial property segment, anticipating further demand and growth opportunities in the sector amid continued resilience in exports and with the rise of e-commerce.

We remain cautious over the outlook for office space, although we continue to expect sustained demand and rents for Grade A offices in choice locations. We also note that the proposed regulatory measures to limit the development of new office space should help alleviate any supply-demand imbalances in the segment.


Axis-REIT's portfolio of properties encompasses offices, manufacturing facilities, warehouse logistics facilities and hypermarkets. The Fund recorded a commendable performance for 2017, maintaining its portfolio occupancy rate at 91.12%. During the year, lease commitments for a total of 1,625,963 sq. ft. of space were secured, both through tenancy renewals as well as through new tenancies. With this, the portfolio's weighted average lease expiry ("WALE") period has been extended to 5.87 years. These achievements are a result of our relentless efforts and initiatives to ensure the portfolio continues to have a strong and stable income flow.

The Fund's strategy over the last five years has been to focus on the industrial property segment. This can be seen in the composition of the Fund's property portfolio, where its exposure to warehouse logistics and manufacturing facilities accounted for 70% of its NLA as at 31 December 2017. This strategy has paid off, as the sector has seen rising demand for industrial properties, which in turn, has lifted property values, and resulted in resilient rental and occupancy rates of industrial properties in recent years.

Conversely, we had expected the office space market to remain challenging given the volume of new supply coming into the market. We limited the Fund's exposure to the office sector, which now accounts for just 6% of its portfolio by NLA (from 32% as at 31 December 2005). There are only three office properties currently in its portfolio, all of which are located in Petaling Jaya, Selangor. That said, we are watching the sector closely, noting that with the proposed curb on the development of office space expected to be enforced, the supplydemand dynamics in the segment should improve.


As part of our efforts to maintain and strengthen the Fund's competitiveness and profitability, we continuously explore opportunities to grow its property portfolio through the acquisition of new properties. In evaluating such opportunities, we place emphasis on the quality of the assets and their fit within the portfolio and investment criteria, as well as the timing of the investment. We ensure comprehensive due diligence exercises are carried out on each potential acquisition.

Our acquisition strategy continues to focus on the industrial sector, and in FYE2017, we concluded the acquisition of Kerry Warehouse, located in Pasir Gudang, Johor, and Wasco Facility @ Kuantan, which is strategically located close to Kuantan Port. Both properties provide attractive income yields and added a total of 669,753 sq. ft. of industrial space to the portfolio, further strengthening the Fund's presence in the sector. The Kerry Warehouse has a remaining tenancy term of three years, while Wasco Facility @ Kuantan is a saleand-leaseback transaction with a 15-year lease. Wasco Facility @ Kuantan is also the Fund's first acquisition with a staggered payment scheme. In essence, the property sits on two adjacent parcels of land, with the acquisition of one parcel completed and fully paid up on 5 December 2017, while the payment for the second parcel was effected on the 9 February 2018.


During FYE2017, we also concluded the disposal of Axis Eureka. The sale and purchase agreement was executed on 24 October 2016, and the transaction was concluded on 8 March 2017. We took the decision to dispose of the property as we believed its income generating potential had been maximised. Coupled with our view that demand for office space in Cyberjaya would remain stagnant, we capitalised on an opportunity to dispose of the property. The disposal resulted in a net gain of RM1.35 million in Axis-REIT's books for FYE2017, and allowed the Fund to redeploy its resources on other yield-accretive acquisitions.


Axis-REIT reached a major milestone in 2016, when the Fund obtained approval from Securities Commission Malaysia ("SC") to undertake its maiden development project - the "build-to-lease" development of the Nestlé Distribution Centre at Axis Mega Distribution Centre (formerly known as Axis PDI Centre). Construction of the 515,000 sq. ft. warehouse logistics facility was completed on schedule, and the Certificate of Completion and Compliance (CCC) was issued on 29 January 2018. The completed facility was handed over to Nestlé Products Sdn Bhd on time. This timely completion demonstrated Axis-REIT's strength in the built-to-lease space.

The 10-year lease with Nestlé Products Sdn Bhd will see rental income commencing on 1 June 2018. The Fund will derive a starting rental of RM11.2 million for 2018, with an agreed step-up every three years.


The Fund continued to make great strides in the builtto-lease industrial facilities segment, entering into its second build-to-lease development on 10 November 2017. The agreement, with Upeca is for the development of a manufacturing facility on 7.02 acres of vacant land at the Malaysia International Aerospace Centre Technology Park, Sultan Abdul Aziz Shah Airport in Subang, Selangor, where the land for the project is sub-leased from MAHB. The project land was successfully leased on 7 February 2018.

The proposed development for Upeca's manufacturing facility includes the construction of a single storey manufacturing plant-cum-office building that will have a gross built-up area of approximately 178,978.60 sq. ft. for manufacturing, storage and distribution of aerospace parts. Construction is expected to commence in March 2018, with completion and handover targeted by end2018. Upeca is ultimately owned by London Stock Exchange-listed Senior Plc.

The agreement with Upeca includes a 20-year initial fixed lease period, with an option to renew for two terms of six years each. With an estimated initial net yield of 7% per annum for the first three years, the monthly rental for the Upeca manufacturing facility is projected at RM465,344.36, with a rental step-up in the later years of the lease period. The total development cost for the project is estimated at RM74.16 million (including the project land).

The Fund obtained the SC's approval for the lease of the land and the development on 14 December 2017. Similar to the Fund's maiden development, this second development is expected to increase the Fund's gross revenue, net property income and income distribution to Unitholders, while growing its total assets under management.


As part of its proactive capital management efforts, AxisREIT undertook a private placement exercise during 2017. This was the Fund's sixth capital raising exercise since its IPO in 2005. The private placement was successfully concluded with the listing of 125.0 million new units on 28 November 2017. Total proceeds from the private placement amounted to approximately RM178.8 million, and was used to pare down the Fund's borrowings, lowering its gearing from 36% prior to the placement, to 29% as at the end-November 2017. This has provided a war chest for Axis-REIT to undertake new acquisitions.


Axis-REIT's commendable performance for FYE2017 is the result of the continued dedication and drive of the staff of ARMB. We would like to thank the entire team, from our distinguished Board members, to the management team and operations staff, for their respective contributions to the Fund's achievements - from formulating the Fund's comprehensive strategies, to translating these strategies into actionable plans and executing these plans efficiently and effectively. We are confident that working together, we can look forward to transcending new boundaries in the years to come.

Finally, we would also like to thank our business partners, tenants, Unitholders, members of the media and the investment community for their continued support. We look forward to our continued collaboration in the years to come.


YAM Tunku Dato' Seri Shahabuddin
Bin Tunku Besar Burhanuddin
13 February 2018

Leong Kit May
Chief Executive Officer/Executive Director
13 February 2018