Singapore’s REIT regime: Due for some changes? — Teo Wee Hwee

FEBRUARY 20 —Singapore is one of the fastest growing markets for real estate investment trusts (REITs) in Asia Pacific with a market capitalisation of about S$68.9 billion, but this leadership position should not be taken for granted.

Hong Kong, often acknowledged as a close competitor, may lag behind now but the Hong Kong Securities and Futures Commission has recently introduced measures to improve the competitiveness and attractiveness of Hong Kong REITs.

In addition, emerging markets like Thailand, the Philippines and India are also coming up with their own REIT regimes, which all serve to intensify competition in the region. Singapore needs to defend its position as the domicile of choice for pan-Asian and international REITs—and here are some suggestions for the government’s considerations.

Improve treaty network

Double taxation agreements (DTAs) can reduce the foreign taxes levied on overseas investment income, and sometimes, on gains from the sale of overseas investments. The extensive network of over 70 DTAs has always been a strong selling point for Singapore as a listing location for pan-Asian and international properties.

However, Hong Kong is playing fierce catch-up by beefing up its treaty network. Some of its treaties provide better terms compared to the ones Singapore has signed with the same countries.

For instance, under the Singapore-Indonesia DTA, the dividend withholding tax is at 10 per cent, whereas the Hong Kong-Indonesia DTA provides for a more attractive rate of 5 per cent. The good news is that Singapore is now renegotiating its DTA with Indonesia, but we should also start considering re-negotiating with Korea, Thailand and Taiwan as well.

Properties in the US, with their long term leases and built in escalation clauses, are very attractive for S-REITs but structuring the listing of these assets can be very challenging as Singapore still does not have a DTA with the US. Further, in relation to European properties, a Luxembourg or Dutch holding entity is still more tax efficient because dividend and interest payment between European Union entities are withholding tax free. Hence, to improve Singapore as a listing location for Pan-European assets, it is imperative that Singapore improves its DTA network with European countries.

Keep costs low

The main attraction of REITs lies in their ability to provide a stable, attractive yield that is mainly derived from rental income. Currently though, rising prices of Asian properties are making it harder for REITs to find yield accretive assets that they need to stay competitive.

On top of this, the impending expiry of the tax incentives for S-REITs on March 31 2015, which include certain Goods and Services Tax concessions for S-REITs investing overseas, will immediately reduce the cash available for distribution and as a result, affect yield to investors. This is likely to further dampen the overall growth of the Singapore REIT industry unless they are extended in the upcoming Budget.

Another way to help S-REITs keep costs low is to ensure that they do not suffer excessive foreign taxation. S-REITS generally do not qualify for tax exemption or reduced taxes under tax treaties unless they invest through complex holding structures. This adds to their overall business and operating costs. To simplify matters, the government could endeavour to include explicit terms in tax treaties to allow S-REITs to benefit from the treaties.

Alternatively, the government could allow S-REITs to be set up as Open-Ended Investment Companies (OEIC), a type of legal entity that currently does not exist in Singapore, if the legal framework is implemented in Singapore. As a corporate entity, REITs set up as OEICs should be able to gain access to treaty benefits as well as enjoy the flexibility they need to manage their investments and operating costs.

Incentivise REIT manager

International property fund managers, when evaluating where to base their operations, would often prefer to locate in countries that have a competitive tax regime. Given that the corporate tax rate in Hong Kong and Singapore are marginally different, offering an initial 5 per cent tax incentive on management fee income may help attract and anchor these managers in Singapore and once they are anchored here, they are unlikely to relocate.

The incentive rate could be for a fixed period, available only to REIT managers appointed to manage an S-REIT(s) and conditional on their committing to an expansion programme agreed with the authorities. The rate could rise to 10 per cent after a number of years, provided the agreed headcount and growth projections are satisfied. Such an incentive would help build a community of REIT managers who are familiar with, and more likely to promote, S-REITs.

While Singapore is an attractive investment domicile jurisdiction, competition is imminent. The expression ‘if it ain’t broke, don’t fix it’ is valid but merely perpetuating the status quo is not what made Singapore successful. There is scope for some tax changes to ensure that the S-REIT remains the vehicle of choice for REITs with a pan-Asian or international focus. It is hoped that Budget 2015 will bring some welcome news in that regard. — Today

* This is the personal opinion of the writer or publication and does not necessarily represent the views of Malay Mail Online.