More flexible guidelines for M'sian reits

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

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.

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.