REIT boost in the offing

PETALING JAYA: The Malaysian real estate investment trust (REIT) sector is likely to get a boost soon, with firmer plans for a national REIT company and a reduction or removal of the withholding tax for REIT investors, sources said.

The national REIT will likely include a number of assets belonging to the Government and government-linked companies (GLCs).

“There is a huge potential for “REITing” these government properties in a similar way Singapore did,” said a source.

In the 10th Malaysia Plan (10MP), there was a proposal for Pelaburan Hartanah Bhd to set up REITs to facilitate bumiputra investment in commercial and industrial properties and benefit from property appreciation.

It is likely that Pelaburan Hartanah would be used to set up the national REIT, drawing from the experience of Singapore.

There the government had made available a vast array of properties to be put into REITs such as those run by CapitaLand.

“The Singapore government wanted to turn Singapore into a REITs hub and has achieved much success with attracting capital to its market,” explained a REIT expert.

The expert added that in Malaysia, there were a vast array of properties still being held primarily by GLCs which could be put into a REIT.

There are 14 listed REITs on Bursa Malaysia with a total market capitalisation of slightly over RM10bil. In comparison, Singapore’s REITs’ market capitalisation is more than RM60bil while Japan’s stands at around RM100bil.

In another effort to boost the REIT sector and to move it on par with markets like Singapore, the Government is likely to reduce or remove entirely the withholding tax for REIT investors. This is something that REIT players had been lobbying the Goverment for the last few years to no avail.

“The aim is to bring it in line with markets like Singapore and Hong Kong where individuals and institutional investors do not pay withholding tax on REIT investments,” said a party familiar with the situation. Both local and foreign retail and institutional investors in Malaysia now have to pay a 10% withholding tax, which had already been reduced from the 25% tax rate previously. The withholding tax rate in Malaysia has not been adjusted since 2008.

ECM Libra head of research Bernard Ching said a reduction of withholding tax for REIT investors would be a major boost for the sector “as the effective dividend yield to shareholders would rise, which would translate into higher capital values for the REITs.”

Analysts have said that REITs in Malaysia had traded at a discount to those in Singapore and Japan in terms of yields and their price to net asset values.

The analysts have said that while factors such as asset and liquidity played an important role in determining valuations, the tax regime and REIT guidelines imposed by governments and authorities in individual countries also affected the attractiveness of all REITs.

Another analyst, however, said the Government may be hard-pressed to reduce the withholding tax, considering that it just postponed the implementation of the planned goods and services tax.

But it is understood that the REIT withholding tax waiver would not seriously dent the Government’s coffers in terms of the total amount of lost tax revenues from this sector. Furthermore, the last tax waiver proposal is believed to be only for a three-year period.

It is understood that these proposals may appear in the soon-to-be- announced Budget 2011.