Published August 22, 2008

More flexible guidelines for M'sian reits

More leeway for expansion, but withholding taxes not addressed

By PAULINE NG
IN KUALA LUMPUR
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MALAYSIA has announced new real estate investment trust (Reit) guidelines that would give Reit management companies greater flexibility to manage and expand their portfolios, but left the issue of its uncompetitive withholding taxes untouched.

Revised guidelines: Reits can now buy property that is under construction or uncompleted real estate

The new measures - a follow-on to earlier ones announced in the last national budget where foreign shareholders were allowed to hold up to 70 per cent of Reit management companies, from 49 per cent previously - make it easier for Malaysian Reits in terms of acquisitions and fund-raising.

Reit managers would be given more leeway to invest in foreign real estate and a portion of their portfolio can consist of real estate that it does not wholly own or claim a majority stake in.

The Securities Commission's (SC) revised guidelines also allow Reit managers to seek a general mandate from unit-holders for issuing units up to 20 per cent of its fund size, where previously the issuance of any number of new units required the specific approval of unit holders.

Although Reits are still not permitted to acquire non-income generating real estate such as vacant land, they can now buy property that is under construction or uncompleted real estate up to 10 per cent of their total asset value.

Trustees would also have a bigger role to play in related party transactions, with new rules introduced to regulate such transactions.

But the new rules designed to give more management flexibility and to augment investor protection aside, there was disappointment in that the main drag on the industry was not addressed.

Reit managers and analysts have repeatedly stressed the country's high withholding taxes on Reit income make it an unattractive proposition for investors, particularly foreign ones, and have stymied the sector's growth with potential Reit owners preferring to look elsewhere.

While the SC has done a good job trying to relax the sector yet protecting the interest of investors, Quill Capita Trust chief executive Chan Say Yeong said the measures would not boost the industry unless the tax issue was addressed. 'What is more important right now is the withholding tax,' he observed, the lack of attention to the matter in the past three years being a sore point with investors. 'Investors tell us on our roadshows that the government is not serious in promoting the industry.'

Malaysia's withholding tax on Reit dividends received by foreign institutions is 20 per cent or twice the amount Singapore imposes. Individuals are also taxed at 15 per cent.

At 7 per cent, Malaysian Reits might offer higher yields, but after deducting the tax, it is not significantly more attractive than the 5-6 per cent yield offered by Singapore Reits - a reason why they did not perform as well even when the stock market was roaring last year.

Despite these disadvantages, CapitaLand has committed to the listing of a RM2 billion (S$844 million) asset-sized retail Reit on Bursa Malaysia, likely to be the largest Reit in the country.

However, the Finance Ministry's reluctance to lower the taxes has been a source of frustration for players who continue to clamour for a reduction ahead of every national budget - 2009's to be tabled next Friday. At the same time, a number of local owners with large property assets have said they do not discount listing their Reits overseas in more favourable markets.

Why the ministry continues to maintain the rate is unclear as analysts said the funds earned are not huge given Malaysia only has some 11 Reits at present, the average asset size less than RM500 million.

In its statement, the SC also said its prior approval on real estate valuation was now only required where the purchase of a real estate is financed, or re-financed within one year, through the issuance of new units. In all other circumstances, it would conduct a post-review of the valuations to ensure they are reasonable and well-supported.