This article is authored by Lam Fong Kiew (Head of Tax, Nexia TS)
Singapore, the island city-state of Southeast Asia spanning a mere 50 km from east to west with a total land area of just 719 square kilometres, represents the second largest REIT market in Asia, after Japan. This is indeed remarkable, given the early perceptions that such a limited stock of land would hamper any ambitions it had in nurturing and growing this sector. The REIT regime was first introduced in 1999, with Singapore marking its first REIT listing in 2002. Since then, there has been no turning back. To date, there are 35 listed REITs and property trusts on the Singapore Exchange (SGX), making Singapore an attractive destination, especially for Asian investors.
Salient features of Singapore REITs
Some of the more salient features of Singapore REITs are as follows:
- Singapore REITs are classified as Collective Investment Schemes and regulated by the Monetary Authority of Singapore.
- REITs are listed on the SGX, which guarantees transparency as well as liquidity for the investors.
- There are no investment restrictions on non-resident investors.
- There are no restrictions on ownership of foreign assets.
- Although there is no legal or regulatory requirement for a Singapore REIT to distribute any predetermined percentage of income as distributions, all Singapore REITs distribute at least 90% of its taxable income so as to enjoy the tax transparency treatment.
- Under the tax transparency treatment, the trustee is not taxed on REITs’ income. Instead, tax (if any) is levied only at the level of the unitholder.
- There are no withholding tax provisions in respect of distributions made to non-resident individuals. However, for non-resident non-individuals, the trustee is required to deduct tax at the prevailing corporate tax rate (i.e. 17%).
- Given the lack of a capital gains tax regime in Singapore, any gain from sale of REIT units is tax exempt unless the gain is derived from carrying on of a trade or business in Singapore.
REITs vs. Real property investments
Today, it is common for most shopping malls, offices and industrial buildings in Singapore to be owned and managed by REITs. This structure offers flexibility to investors wanting the exposure to these asset classes but may lack the time and resources to invest directly in them. Investors have the opportunity of enjoying passive rental income through the distributions paid out while standing to benefit from any gains in the property values over time through the REIT unit’s price appreciation.
The role of foreign property assets in Singapore REITs
While many REIT markets have remained largely domestic in their focus, Singapore from the outset has been able to attract a very diversified pool of assets. As shown in the pie chart provided below, foreign property assets constitute more than one-third of the total asset value of Singapore REITs.
The outlook in 2016
At a time when real estate markets in many parts of the world are facing headwinds, Singapore REITs have been true to form in delivering boringly steady returns. Indeed by some measures, they have handily outperformed their global and regional peers. According to a recent report released by the SGX, the Singapore REIT index’s total return of 12.2% from January to July 2016 significantly outperformed the benchmark MSCI World REIT index’s 7.6% in Singapore Dollar terms over the same period.
Even against the lacklustre backdrop of new listings in general, the REIT sector has been a rare bright spot for the SGX. 2016 has proved to be a bumper year for REIT listings with three major listings from the US, Australia and China. Manulife US REIT raised $519m while Frasers Logistics and Industrial Trust raised $672m with its listing of Australian properties. This was followed by EC World REIT raising $630m with its listing of logistic properties in China.
Recently, SGX launched its first Exchange Traded Fund (ETF) for Singapore REITs. The ETF aims to track the index of the S-REIT 20 Index, which measures the performance of the top 20 largest REITs listed on the SGX. In addition, the SGX has launched an index to track a basket of 30 REITs across Asia-Pacific region (excluding Japan) with an ETF to track this index. Both of these ETFs would allow investors to diversify their portfolios enabling them to access some of the largest REITs in Singapore and the Asia-Pacific region.
A brave new world beckons…
The success of the REIT sector in Singapore can no doubt be attributed to many factors such as the readily available pools of capital that could be tapped, a mature local and international investor profile and the ecosystem of infrastructure and service providers that come with being a global financial centre. But at the core of its success lies an effective regulatory and tax framework that underpins the Singapore REIT regime. While the market conditions that ultimately dictate investor interest are often fickle and beyond the control of any one party, the legal, tax and regulatory framework that underpins the regime is not and Singapore will need to ensure the framework stays relevant in a constantly evolving REIT landscape.
For more information, please contact:
Mr Edwin Leow