S-REIT index funds to lure capital after tax disclosure changes

Analysts project higher demand for S-REITs after prices dropped 8-9% in January.

S-REIT exchange traded fund (ETF) investors no longer have to scratch their heads whilst wondering how much they invest into each S-REIT. The tax transparency treatment that was applicable for S-REITs would now apply to S-REIT ETFs as well.

This means that REIT ETFs, which are now subject to the prevailing corporate tax rate of 17%, would no longer be taxed based on the specified income that is distributed to their unit holders. The tax concession for REIT ETFs is to take effect on or after 1 July, with a review date set for 31 Mar 2020.

Previously, the demand for S-REIT ETFs was partially hampered by the lack of tax transparency. DBS analyst Derek Tan noted that this means consistent tax treatment now for both S-REIT ETFs and individual S-REITs. “We believe this will facilitate the flow of capital into S-REIT ETFs for those investors who want an overall S-REIT exposure without having to select individual S-REITs. This is an incremental positive for overall S-REIT demand, especially as the S-REIT index has corrected by 8-9% from the highs in January,” he added.

RHB analyst Shekhar Jaiswal noted that the review date coincides with the date for review for other tax concessions for S-REITs. “We anticipate more REIT ETF-based products to hit the market in the near term. The move would also help widen the investor base for REITs and aid in boosting the liquidity for underlying S-REITs,” he said.

ARA Private Markets analyst Yang Liang Chua concurred with RHB and said this measure achieves parity in tax treatment between investing in S-REITs and REIT ETFs. “This would have a positive effect on the S-REITs market through the broadening of the institutional investor base and enhanced liquidity. We can also expect more listing of REIT ETFs,” he added.

Moreover, Singapore's changes in tax treatments could push S-REITs' growth further. Ever since the launch of the first S-REIT in 2002, the sector has grown to be sixth largest market globally with a market cap of US$53b. More than two-thirds of S-REITs hold foreign properties, and 10 of the 32 Singapore REITs have portfolios that comprise entirely foreign properties.