Reits opportunity seen amid push for Asia tax reform
The Asian market for real estate investment trusts (Reits) looks set for a boost as a regional lobby group pushes for the harmonisation of regional tax rules.
The association for real estate investments in Asia is stepping up efforts to convince regional governments to remove tax impediments and bring real estate into the mainstream of fund investments.
The regional group’s chief is now pursuing a common funds passporting system for Asia, along with the development of 'state of the art' Reits in China.
Peter Verwer, Singapore-based chief executive of the Asia Pacific Real Estate Association (Aprea), told AsianInvestor the association is already being much more active in its lobbying efforts across the region. With a plan to “radically boost” its engagement with governments, Verwer said: “When governments better understand our industry, they will listen harder to our policy solutions.”
The campaign has already gained some success in its dealings with the Indian government. Two months ago, Aprea welcomed the Indian budget changes designed to harmonise tax treatment of funds, but they stopped short of full endorsement of the changes, because of the so-called Minimum Alternative Tax (MAT). Last week, that barrier was removed.
Verwer commented: “India’s government has agreed to remove another major barrier to I-Reits – the MAT. We are currently scrutinising the announcement and dealing directly with the Department of Finance to check that the new MAT rules will work in practice.”
As well as being a source of yield for institutional and private investors, Reits are seen as a useful means of raising finance for real estate development. They are, in essence, income-producing funds which have as their underlying investments a wide variety of commercial real estate, ranging from office and apartment buildings to warehouses, hospitals, shopping malls, hotels and infrastructure.
Verwer said: “As these regional markets open up, they do have to get their tax rules right and their foreign investment rules right. Our policy platform is designed to improve the ground rules for doing business, reduce taxes, eliminate cash traps and increase cross-border investment certainty.
“The target is to increase real asset allocations by pension, insurance and provident funds as well as sovereign funds.” He adds that aged care centres and student accommodation are active topics for Asian investors looking for stable yields, and who traditionally have fallen into the “patient capital” bracket.
Insurance companies can manage Reit investments within their long-term return targets. Verwer says: “They can also get a pay-off and a degree of comfort, because they can put their real estate exposure through a fund, and have public and private markets portions.
“That’s why Reits are so popular and why Aprea is trying to open up these markets and harmonise the tax rules.”
Verwer is confident that the market is moving towards “a very clear attempt to clarify the tax rules” and is encouraged by the list of markets that are opening up. The holy grail is a bigger, deeper and faster growing property universe across Asia Pacific.”
He says Aprea’s new priorities include a campaign for “state of the art” Reits in China and lobbying for a “common market funds passport” for Asia.
The major Reit markets of the region are Australia, Japan and Singapore, while Hong Kong trails, having little over half the assets that Singapore has, and fewer than one third of the listed Reits. Thailand has only a tenth of the assets of Australia but has just as many listed Reits (55).
| Country | Market Cap. ($bn) | Number of Reits |
|---|---|---|
| Australia | 91.1 | 55 |
| Japan | 89.3 | 51 |
| Singapore | 50.3 | 37 |
| Hong Kong | 28.7 | 12 |
| Thailand | 9.8 | 55 |
| Malaysia | 6.6 | 15 |
| New Zealand | 3.4 | 5 |
| Taiwan | 2.6 | 6 |
| South Korea | 1.0 | 6 |
| Total | 282.9 | 242 |
| Source: Aprea, figures to 31/12/2014 | ||
Aprea has also had lobbying success in Singapore and Verwer believes the city-state is well-placed to become the Reits hub for Asia. The Singapore regulators, he says, “are really committed to making Reit listing user-friendly. Singapore has the experience and the capital markets structure, plus it has the tax efficiency that Australia, for example, does not have.
“The Singapore government has very clearly signalled its determination to champion a competitive Reit market for the rest of the decade,” said Verwer. “The recent decision to extend tax incentives to 2020 will underpin Singapore’s position as a financial services hub in AsiaPac.”
Japan is another exciting market, he says. It is roughly the same size as Australia in terms of market capitalisation (both had around $90 billion in Reits at the end of 2014) while Japan has 51 Reit listings and Australia has 55. There are huge urban redevelopments taking place in Japan and property purchases by the “wrinkled consumer” are driving real estate returns and construction activity.