Challenging times ahead for Singapore Reits

20131127-bt-challenging-times-ahead-for-sg-reits-pic Singapore has established itself as a major Asian hub for real estate investment trusts (Reits) in slightly over a decade, but it now faces a mix of both external challenges and domestic constraints.

Other regional markets are establishing their own Reit and business trust (BT) frameworks and will compete increasingly for listings, while on the domestic front, the Singapore market has to resolve several issues including development caps and sunset clauses which threaten to erode its tax advantages. Singapore’s Reit success has spurred others into action in the region.

The Philippines, for instance, has had regulations for Reits in place since late 2009. While the sector has not taken off, the Philippine Stock Exchange has recently said it sees the need to revive talks on the implementation of Reit laws and relax stringent tax rules to help the market grow.

Elsewhere, Thailand has created a regulatory framework for real estate companies to form Reits, while India has also joined the fray, with market regulators expected to issue final guidelines on Reits as soon as early next year.

The challenge this poses to the Singapore market is that Reits tend to do best when located in the jurisdiction where their physical assets are found, given that investors will be more familiar with the assets. As other Reit jurisdictions develop, there will be less incentive for real estate players in these markets to leave home and come to Singapore to list.

Singapore Reits venturing overseas may also have to compete against these Reits for assets.“There will still be opportunities for Singapore Reits to acquire overseas assets, but they will always be competing against the local Reit market which may trade at a lower cost of capital because of investor familiarity,” said Michael Smith, head of real-estate investment banking in Asia ex-Japan at Goldman Sachs.

That being said, the asset diversity of the Singapore Reit sector is seen helping it stay ahead despite the increasing competition. Notably, of the 35 S-Reits listed here, 12 have both Singapore and foreign assets, 10 have purely offshore assets, while 13 feature purely local assets.

“In Singapore, our Reits are buying everywhere, including Europe, US, Vietnam, and investors appreciate it. So I think for regional Reits, Singapore will continue to have the competitive edge,” said Tan Kok Huan, managing director, asset-backed structured products, capital markets group, at DBS Bank.

Taking Croesus Retail Trust (CRT) as an example, Mr Tan noted that while Japan has a larger Reit market than Singapore, CRT listed here because it has an Asia-Pacific mandate was not confined to just Japanese assets. CRT’s pipeline of assets with right of first refusal is all in China.

The regulatory regime in Singapore also remains attractive and does not impose any restrictions on ownership of foreign assets. “Singapore is currently the only market where you can list purely offshore assets. If somebody wants to list purely offshore assets and that country doesn’t have a Reit or BT market, Singapore is the natural choice,” added Mr Tan.

It is for this reason that Fortune Reit, which holds a portfolio of retail malls and properties in Hong Kong, was able to successfully list on the Singapore Exchange in 2003, just two years after the very first Reit in Singapore was successfully launched.

It helps that Singapore’s tax regime does not impose further taxes once an entity has been taxed in a country with a headline tax rate of 15 per cent or more, he noted. For that reason, Reits and business trusts holding purely-foreign, or a mix of local and foreign assets proliferate the Singapore market today.

These include Ascendas Hospitality Trust with an Australia-based portfolio; Religare Health Trust which is entirely based in India; Mapletree Greater China Commercial Trust; and Croesus Retail Trust which has 100 per cent of its assets based in Japan.

The Singapore-based Reits are able to employ tax efficient structures to hold assets overseas, such as the Asset Backed Structure in Malaysia, or the Managed Investment Trust (MIT) regime in Australia, said Jerry Koh, partner at Allen & Gledhill LLP.In Japan, it is possible to employ securitisation structures such as “Tokumei Kumiai” (TK) or “Tokutei Mokuteki Kaisha” (TMK), said Mr Tan.

"We are able to achieve through TMK structure, a tax outcome in which the effective tax rate is equivalent to that of a J-Reit. This is a structure that a lot of foreigners are using to buy Japan assets.” Still, there are issues facing the Singapore Reit sector that may need addressing.

Top of the mind for most players is the sunset clause attached to the tax incentives here. For instance, the existing income tax, stamp duty, and GST concessions for listed Reits were renewed for an additional five years at Budget 2010, to March 31, 2015.

In addition, the Foreign-Sourced Income Exemption (FSIE) income tax, which previously did not have a sunset clause, was, as of 2010, subject to a sunset clause of five years till March 31, 2015.

Extending this will provide certainty, particularly for investors, given that the incentive for individuals to receive distributions tax free is a powerful incentive, noted market watchers. It might also be timely to relook the development limit imposed on Reits.

Currently, Reits are only allowed to hold up to 10 per cent of their total assets in development. “As the market matures, some of the buildings get old and this affects the rental performance of that particular building. Sometimes, it is not enough to do a small asset enhancement.

You may need to do a bit more, perhaps tear down the structure. I think we should allow this, subject to some safeguards because we have to protect investors and their returns,” said Mr Koh.

Sing Tien Foo, Associate Professor at the Department of Real Estate, National University of Singapore, agreed, noting that the 10 per cent development limit benefits larger Reits over smaller ones.

“If you look at Australia for example, there is no constraint on development, and the market sorts it out. Reits with a lot of development activities are seen to be more risky, and the market is efficient enough to differentiate this,” he said.

Singapore’s small size is also a natural constraint. But this does not mean there is no longer scope for local assets to be fed into Reits or business trusts. “Because Singapore is a very finite island, of course some say there’s limited ‘Reitable’ property, that’s why they have to go overseas,” said CapitaLand Singapore chief executive Wen Khai Meng.

“But I still think there are still a lot of opportunities because the population is still growing, the economy is expanding, and there’s going to be a lot more shopping malls, hotels, offices, industrial buildings, business parks, and logistics warehouses, etc. In addition, we have a lot of government buildings and HDB car parks which could well be put into a Reit.”

On the business trust end, there are plenty of opportunities to list marquee assets, said DBS’s Mr Tan. “What would be great is listing our marquee assets with household brands. Asset class like telecoms, train stations, power assets, ports and utilities give you very stable cash flow.

hailand has their skytrain (BTS), Hong Kong has their telecom (HKT Trust). Yes, there are still assets with household names and stable cash flow that can be injected into BT.”

Looking ahead, John Stinson, executive managing director for Asia-Pacific capital markets at Cushman and Wakefield, said he expects seeing more listed Reits providing a vehicle for exposure to emerging markets and a range of foreign currencies, for example, an RMB fund.

Source: Business Times, 27 Nov 2013