Published February 16, 2009

Reit managers fail to get payouts trimmed

Move to cut payout ratio flops as investors demand certainty: sources

By KALPANA RASHIWALA

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(SINGAPORE) The authorities have turned down requests from some Reit managers to reduce the minimum payout ratio to unitholders, BT understands. This is currently set at 90 per cent of the distributable income of a Real Estate Investment Trust (Reit).

The Reit managers have also failed to get a tax holiday on undistributed income, sources say.

Some institutional investors are believed to have recently given feedback to Reits as well as Monetary Authority of Singapore that allowing a reduction in the 90 per cent minimum payout ratio would detract from a fundamental characteristic and key attraction of investing in a Reit - the certainty and stability of income to unitholders.

'Basically, there would be income volatility once you lower the minimum payout ratio, because the Reit manager will have discretion to decide how much of a Reit's income it should pay out to unitholders,' a senior executive of a major Reit manager explains.

'We have institutional investors who have told us they wouldn't like Reits' minimum payout ratios to be lowered from 90 per cent currently. It would defeat the purpose of a Reit.'

BT reported last month that some Reit managers had urged the government to trim the minimum payout to unitholders to as low as 50 per cent of distributable income, while still allowing Reits to enjoy tax concessions.

The proposals to MAS were initially championed by managers of some of the smaller Reits as a way of conserving cash in today's tight credit environment, to service debt or even try to trim debt.

At first, even managers of a few of the bigger Reits are said to have been sympathetic to such calls, if it could help their smaller counterparts temporarily tide over their cashflow problems, in the interest of helping the S-Reit industry - although these big Reits themselves may have had no intention of lowering their distribution ratios.

However, there has been concern since then that institutional investors, such as superannuation funds, insurance companies and other funds that count on the certainty of a regulated minimum distribution from their investments in the S-Reit sector, may lose confidence and pull out from this market if this rudimentary attraction of Reits disappears.

An executive of a private investment vehicle involved in the S-Reit business said: 'Investors who went into the Reit market looking for a steady distribution stream would not want the distributions on their units to be halved and used as a backdoor recapitalisation of the Reit.

'Reit managers may have no choice but to look for ways to raise equity to recapitalise their business. This means holding a general meeting to seek unitholders' mandate for the issuance of new units for the raising of new capital. The decision must come from the unitholders themselves, and not within the free reign of Reit managers, or indeed the MAS.'

The authorities are also said to have decided against granting a tax holiday on any undistributed amount of a Reit's income, even if this stays at the current maximum 10 per cent of a Reit's income.

S-Reits have to pay out at least 90 per cent of their distributable income to unitholders to enjoy tax transparency, which means exemption from paying corporate tax at the Reit level on the portion of income they distribute.

Some Reit managers had wanted the government to continue according them tax transparency, even at the lower payout ratio. A few even suggested MAS go a step further and grant Reits a tax holiday on the income that they withhold from distribution.

These suggestions had drawn flak from some quarters. A major question raised was why Reits should continue to enjoy exemption of corporate tax at vehicle level, if they trimmed their distribution payout ratios, when many other listed companies also return a chunk of their profits to shareholders, but still have to pay corporate taxes.