Dear Valued Unitholder of Hektar REIT,

In perspective

When Hektar was formed, we aimed at building a business of owning and managing shopping centres in Malaysia. We based our business model on best practices worldwide and we aimed at creating world class retail environments for Malaysian consumers. When we listed in late 2006, we were and still remain, the first retail-focused Malaysian REIT. At that time, the REIT sector was still in its nascent stage in Malaysia, the world economy was still in ascent. Today, conditions appear to have changed. The world economy is in descent; the Malaysian stock market has declined in tandem and with it, property stocks and REITs. Political and business leaders around the world are pondering about the state of the economy and what next steps to take. Financial markets are experiencing significant volatility, which are adversely affecting the broader economy. Despite the negative environment, Hektar’s vision remains the same – owning and managing world-class retail destinations for Malaysians.

We believe the core fundamentals of our business and long-term prospects of the economy remain positive. Malaysia’s population is still growing, young and urbanizing; the economy is developing, diversifying and while still trade-dependent, also supported by valuable commodity exports in the form of petroleum and palm oil. Retail shopping space remains a developing market, especially in the hinterland and secondary cities of the country. Above all, we believe the execution of our business model still allows us to provide a discernible difference in elevating the standard of retail in Malaysia.

My point for emphasizing this positive vision is to reassure our long term unitholders that we do intend to meet our goals over the long term – creating substantial growth and value from our REIT. Provided that the core fundamentals remain positive, we will continue to execute towards achieving these objectives. We are in this for the long run.

In the short term, we will reflect on the current environment and adapt ourselves accordingly. It seems prudent at this time to re-examine our framework for managing risk to support growth in the future. We will continue to move forward on our strategy at a pace that reflects the economic realities of the times. We will elaborate on our strategies further, in this letter.

In summary, our core business did well in 2008, meeting and surpassing its budgets. Portfolio operations remain in the positive territory, financials solid. Only our unit price performance on Bursa Malaysia disappointed. While we understand the concerns about the economy’s outlook and potential impact on our business, we believe unitholders should take some comfort in the view that Hektar remains profitable with a defensible income stream and positive cash flow. We have resilient assets and safe dividends.

Financial performance

For the financial year ended 31 December 2008 (FY2008), Hektar REIT delivered a dividend per unit (DPU) of 10.20 sen. This is approximately 13.2% higher than the forecast provided in the initial public offering (“IPO”) prospectus dated 15 November 2006. This is also 3.1% higher than the annualised DPU of 9.89 sen delivered in FY2007 (DPU of 10.71 sen over a 13-month period). Investors, particularly foreign investors, excluding corporates, will also enjoy a reduced withholding tax of 10% for 2009 (2008: 20%).

Net income (realised) per unit, or earnings per unit (EPU) achieved was 11.32 sen, which is 25.6% over our IPO forecast. This is 7.0% higher than compared to the annualised EPU of 10.58 sen achieved in FY2007 (EPU of 11.46 sen over a 13-month period). This was achieved by higher revenues at RM84.1 million and net property income of RM52.7 million, which were respectively 7.4% and 6.9% higher than FY2007.

Since the IPO listing, Hektar REIT’s Net Asset Value (NAV) per unit has increased approximately 22% to reach RM1.26. This represents an annualised capital growth of approximately 10%. The property portfolio value has increased to RM713.4 million, up 39% since IPO, in part due to the Muar acquisition, which will be discussed later.

Hektar’s financing is secure and done by way of an Al-Murabahah Overdraft, which is actually a fixed-term tenure, annual floating rate debt. The first tranche of RM184 million, drawn at IPO, will expire in 2011, while the second tranche was drawn for the Muar acquisition and will expire in 2013. The weighted average cost is 4.70% reflecting the decline in interest rates in the last year in Malaysia (2007: 4.95%). The total gearing for Hektar REIT as at 31 December 2008 is at 40.8% of Gross Asset Value.

Overall, revenue was up, costs under control, financing secure and therefore dividends to unitholders increased on an annualised basis. These achievements were unfortunately ignored by the stock market. In spite of these positive performance, Hektar REIT’s unit price declined by 49% in 2008. In our opinion, the decline of the unit price reflects the conditions in the capital markets, rather than the REIT’s performance and prospects. Based on the closing price of RM0.77 on the last trading day of 2008, Hektar’s DPU of 10.20 sen represents a compelling value with a trailing dividend yield of 13.2%.

We manage Hektar REIT’s business for long term wealth creation. We cannot directly influence the unit price, but we do view it as a benchmark. In the application of best practices, a useful tool for analysis is benchmarking particularly of non-financial measures. Non-financial measures are operational statistics, which provide useful information on the portfolio of the REIT. Whereas financial performance provides the results of what the REIT has achieved, non-financial performance provides an indication of what the REIT may achieve in the future.

Let us share our non-financial performance, better described as part of our portfolio commentary.

Portfolio commentary

FY2008’s positive financial results were achieved by focused execution at the operational level of the shopping centre. Optimised leasing strategies, design to balance between providing a comprehensive tenant mix to consumers and maximizing rental income are tracked by rental reversions. For 2008, a total of 101 new tenancies and renewals in Hektar’s portfolio recorded an average increase in rental rates of approximately 8%. All three shopping centres in the portfolio saw rental rate increases on the average in 2008.

Hektar’s expiry profile for FY2009 indicates that roughly 84 tenancies will expire, representing 23% of total monthly rental income for December 2008. This is a manageable number, considering that the standard retail lease tenure in Malaysia is 3 years. We have confidence in our properties to negotiate three year term leases as it allows us to adjust to the market, particularly in terms of consumer trends. Consumers want the latest retail concepts and offerings, so we are constantly on the lookout to bringing in new retail formats to keep our centres appealing to customers.

As at 31 December 2008, average portfolio occupancy was a relatively high 95.8%, with Subang Parade registering 99.8% occupancy and Mahkota Parade achieving 96.5% occupancy. Wetex Parade’s occupancy stood at 83.1% as at 31 December 2008, representing a current transformation of the tenant mix which is currently in progress. We will elaborate more on Wetex Parade later.

We have a strong, diversified revenue base, consisting of more than 300 tenants in our portfolio. The largest is Parkson, which contributes approximately 11% of monthly rental income. Beyond that, no other retailer contributes more than 3.1% of monthly rental income. Furthermore, in our analysis of our retailers, less than 1/7 of our rental income comes from single store retailers, which are generally considered the most vulnerable in an economic recession. At this point, more than 85% of our tenancy rental income is derived from national chain stores and international brands.

Visitor traffic to the portfolio dipped slightly in 2008, reaching 15.9 million for both Subang Parade and Mahkota Parade, a slight dip of 4.3% compared to 2007. This has been attributed to the initial public reaction to the petrol price increase in June 2008 and the overall reaction towards higher prices in early to mid-2008 – casual shoppers, particularly those most impacted by higher petrol and food costs, stayed at home. While visitor traffic is an important key performance indicator (KPI), it is not directly correlated to shopper spending.

Occupancy cost

Key to Hektar’s leasing strategy is the employment of Turnover Rent and Step-Up Rent provisions. Turnover Rent provisions exist in 74% of all Hektar tenancies and in more than 90% for both Subang and Mahkota Parade. Similarly, Step-Up Rent provisions exist in 63% of all tenancies, portfolio-wide. Since Wetex Parade was acquired in May 2008, all of its tenancies will be converted to include Turnover Rent and/or Step-Up Rent provisions as they are renewed over time. The most important provision is the Turnover Rent component, which as part of the tenancy agreement, compels a retailer to provide Hektar with their monthly turnover. Hektar has now collected close to 2 years of records of turnover for 90% of its tenants in Subang and Mahkota Parade. Implicit in the turnover record is the ability for Hektar management to analyse occupancy cost. Occupancy cost is the measure of rental income over tenancy sales. Based on international benchmarks, once occupancy cost hits above 20%, there is a chance that a retailer becomes unprofitable with further rental increases and this obviously limits their future participation in the mall as well as constrain Hektar’s ability to increase rental income. We continue to monitor our portfolio occupancy cost carefully, particularly over the next12 months.

Muar acquisition

The Muar acquisition was completed in May 2008, featuring an integrated retail development consisting of Wetex Parade and Classic Hotel. Both the hotel and the shopping mall form part of an integrated development and their internal facilities could not be easily separated in this instance. As a result, we acquired the whole development for RM117.5 million, including the hotel on a sale-leaseback basis. We secured a ten-year net lease for the hotel with the same operator that has been running it over the last decade. The annual lease starts at RM2.15 million for the first year which represents less than 3% of our FY2008 revenue. More importantly, as a net lease, the operator will continue to run the operations profitably as it has done in the past, leaving us to continue focusing exclusively on retail.

Wetex Parade is the leading department-store anchored shopping centre in the Muar district. While smaller than Subang or Mahkota Parade, it still retains a full-fledged tenant mix anchored by The Store and serving a district population of 328,695.

Hektar plans to bring its experience of managing retail to Muar. Even the best shopping centres constantly require attention to ensure that they maintain market share and remain relevant to shoppers. Planning the retail mix therefore, is a key success factor in managing shopping centres. The retail plan is about achieving the balance between selecting the right specialty retailers (i.e. popular), placing them in strategic areas of the mall, while promoting new, up-and-coming retailers and ensuring a comfortable, safe and entertaining environment for shoppers. All this must be balanced against profitability and controlled capital expenditures. There are universal elements in the way people shop, though local culture can play an influence. The Hektar method is to listen to customers, which is why we invest in market research and then combine those findings with our own best practices to produce a product, in this case, a balanced retail mix.

We will manage change at Wetex Parade. The occupancy is currently running at 83.1%, which is appropriate at this stage, as we are slowly replacing old retailers with new formats and just as importantly, we are planning to shift specialty retailers around the shopping centre. We have installed the FootFall system to track shopper visits to the mall and have recorded over 1.9 million visits since last September. This is also in response to our marketing, which we have increased aggressively since moving in last May. We will continue to make improvements to Wetex over the next year.

Challenges and outlook

Uncertain economic times tend to bring out the strengths or weaknesses in any organisation. The financial crisis of 2008 and resultant global economic slow-down will have an effect on Malaysia. Most of Malaysia’s top export markets, with the exception of China, have reported their economies already in recession. Consequently, this is expected to impact Malaysia over the next 12 months.

The government has taken various measures to mitigate the expected economic slowdown, by lowering interest rates, reducing EPF contributions and a recent RM7 billion fiscal measure to stimulate the economy. Taking these initiatives into account along with the potential impact from the global economic slow-down, it is not clear whether Malaysia’s economy will into enter or avoid a recession. What is fairly clear is that expectations of a deteriorating economy are rising and we can expect more difficult economic conditions over the next year.

We are not in the business of predicting economic recessions. We are in the business of owning and operating shopping centres and optimising their financial performance in good times and bad times. We have built a successful business model, based on international best practices. Our systems of FootFall, Turnover Rent and our methods of research have enabled us to better understand our key markets and translate that intelligence into practical measures. The result is that this has allowed our portfolio to return positive growth for Hektar REIT since the IPO listing.

Potential for acquisitions

We are very selective on acquisitions. External growth for the REIT is not programmed, though we have set targets. In 2008, we did look at fair number of retail properties, though we have seen deal flow at a muted pace in the last quarter of the year, as buyers and sellers sat on the side in view of the world-wide financial turmoil.

Ultimately, Hektar aims to own retail developments in all key population centres throughout Malaysia. Our preference has been for retail developments in well populated areas with clearly defined catchment areas. There are more than 34 towns and cities throughout the country with a population over 100,000, suitable to support a decent sized neighbourhood shopping centre. In the long run, strategically, this provides Hektar with a network of malls to promote up-and-coming retailers or to provide bulk-leasing for national chains. In many towns, we have seen old and new retail shopping centres, including some under construction. Before we commit to any new market, we do need to size up the market potential and the competitive landscape. This is one of the reasons why we have said yes to only one acquisition last year, while the rest are still under consideration.

If the economy remains a challenge in 2009, we do see a silver lining. Challenges in the financial markets and broader economy will weed out weaker players, providing us with less competitors when growth returns. We also expect asset owners to be more flexible in their pricing and terms during this cycle.

Financing is secure

Hektar continues to have access to financing at this time. The Malaysian financial sector, less integrated globally, is less impacted from the world financial crisis. This insulation has allowed Malaysian banks to continue to lend or offer to lend during these current times. In Hektar REIT’s scenario, the gearing ratio is currently at 40.8%, which may limit the ability to finance new major acquisitions particularly if the market is not conducive for the issuance of new units to raise equity capital. Nonetheless, when attractive opportunities come along, it would still be possible for the sponsor Hektar Group to privately finance and incubate acquisitions before injecting them into the REIT at an appropriate time.

Raising equity is one of the more expensive forms of capital. It is particularly expensive if it is issued at a dilutive price, typically below a company’s net asset value. This is one of the reasons why we are reluctant to issue new units to fund acquisitions. If Hektar’s unit price remains below its NAV at RM1.26 per unit, it will be challenging to find acquisitions which are yield accretive. Challenging, but not impossible, as certain retail assets have the potential to be refurbished and enhanced to improve yields over a short period of time.

Neighbourhood retail is resilient

The strength of Hektar’s portfolio lies in its selection of assets focused on solid population catchment areas. A key attribute of Hektar’s properties is each individual shopping centre’s focus on their core market. Typically, we denote Hektar properties as more neighbourhood focused, or neighbourhood malls.

Neighbourhood malls contrast with regional malls, in terms of size and retailer scope. Regional malls are larger, typically 1 million square feet and above and with a tenant mix which emphasizes the one-stop shopping centre. As a result, regional malls tend to have large numbers of retailers, including leisure, entertainment, luxury – featuring retailers appealing to more discretionary consumer spending. Due to their size, regional malls need to attract larger catchment areas, including secondary areas more than 30 minutes’ driving distance away. Neighbourhood malls in contrast, tend to focus on their primary catchment usually within 15 minutes’ driving distance. Smaller, usually less than 500,000 square feet, neighbourhood malls tend to emphasize retailers serving the needs of the primary catchment.

Hektar’s neighbourhood-class malls feature retailers who sell basic necessities, mid-tier food and beverage, groceries, prescriptions and services, which are less affected during economic downturns than tenants who depend on discretionary, high-end purchases. Consequently, we feel neighbourhood malls tend to be more resilient during economic downturns. This is one of the reasons why our strategy is to focus on neighbourhood-class malls.

Maintaining focus

Retail real estate is a management intensive business. It is no coincidence that the top REITs in the world are strictly focused on retail assets. In fact at this time, the largest REIT in the world is Westfield Trust, based in Australia; the largest REIT in the United States is managed by Simon Property Group and the largest REIT in Singapore is CapitaMall Trust – all of them, strictly focused on retail properties. In Malaysia, Hektar understands retail and will continue to focus on retail.

Acknowledgements

We are delighted to have representatives from Frasers Centrepoint Limited to join our board this year. We now have 2 directors nominated by Frasers Centrepoint Limited, Mr. Lim Ee Seng and Mr. Christopher Tang and a new independent director, Mr. Philip Eng. In addition, Christopher Tang also sits on our Executive Committee. We are pleased to have their support and contribution in this past year.

Our achievements and successes revolve around people. At all levels of the group, our people are passionate about what they do, bringing pride and professionalism to their work. I exhort them to approach each day to strive to do everything they can in the form of best practices. If our people continue to delight shoppers and support our retailers, we believe their efforts will ultimately reward our unitholders.

On behalf of the Board of Directors of Hektar Asset Management, I want to thank our people for their dedication and commitment to their work. We are proud to have you as our team. To our unitholders, I wish to thank you again for your continued trust and support in the past year. Last but not least, to our shoppers, thank you for continuing to visit and patronise our shopping centres.

The year ahead is expected to be very challenging. To all stakeholders, unitholders and partners alike, I would like to share a personal maxim of mine for these times: think positive.