Malaysia and neighbouring Singapore have REIT markets that are charting very different courses to each other. Bee Lin Ang reports.

Singapore’s REIT industry, the third biggest in Asia, has more than doubled in size in the past five years. The REIT sector in neighbouring Malaysia is a sixth of the size but has grown five-fold over the same period.

Both countries are charting different paths to ensure their own successes in Asia, where investor interest in the asset class has grown rapidly since the launch of the first Japanese J-REIT in 2001. Including Australia, the market capitalisation of Asia Pacific REITs is approximately $170bn.

Singapore’s REIT market capitalisation is about $45bn compared with Malaysia’s $7bn. Singapore’s first REIT, CapitalMall Trust, was listed in 2002.

The city state has established itself as a centre for cross-border REITs, says Ken Atchinson, managing director of Melbourne-based Atchison, a real estate consultant and property investment manager. “Singapore REITs are targeting the real estate markets of China and India and that is quite an extraordinary development,” he says. Of the 37-listed REITs in Singapore, 17 hold assets in other jurisdictions. REITs that have assets in China include Ascendas, Mapletree and CapitaLand.

According to a 2012 survey by Pramerica, ‘A Bird’s Eye View of the Global Real Estate Market’, Singapore has the largest REIT market in Asia relative to the size of its overall investible real estate market, indicating investors’ confidence in its REIT structure and regulations.

REITs are popular among investors due to their tax benefits and payout rules in most markets. In Singapore, requirements for REITs to pay out at least 90% of their distributable income to unit holders, backed by a strong financial regulatory and legal system, means the city state is currently a top destination for REIT listings in Asia. In comparison, in Malaysia, there is no mandatory rule for the 90% payout and in Hong Kong there are no particular tax benefits, allowing Singapore an edge with investors.

While Singapore taps investor interest on cross-border REITs, the growth of the Malaysia market is expected to be driven by domestic requirements and the country’s strong platform for Sharia-compliant investment products.

“Malaysia is rather focused domestically with local assets and local management,” says Atchison. “Another advantage that Malaysia has is its Islamic finance framework and they have great potential to grow that segment of the market.” 

Malaysia’s first REIT, Axis, was listed in August 2005. Under current rules, foreigners can only hold up to 70% of the equity of the management company, and a minimum equity of 30% must be held by Bumiputera (indigenous) investors and stamp duty exemptions apply for instruments of transfer relating to properties disposed to REITs approved by the Securities Commission. In Singapore, there are no restrictions on foreign ownership and no stamp duties applied to the transfer of units. Tax exemption is granted on foreign dividends, foreign interest and foreign trust distributions derived in respect of foreign assets, subject to certain conditions. This tax exemption will expire on 31 March 2015.

In Malaysia, where a REIT distributes at least 90% of its income a year and is exempt from tax, distributions to foreign institutional investors are subject to a final withholding tax of 10%. This rate is effective up to 31 December 2016.

The TR/GPR/APREA (Thomson Reuters/Global Property Research and Asia Pacific Real Association) Composite REIT Index showed that REIT unit prices in Malaysia reached a record in May last year, while in Singapore prices were at their highest in April 2013. Malaysia’s first-ever stapled REIT, KLCC Property Holding, the country’s largest REIT by market value and asset size, was listed in May. Sentiment was supported by buying interest in the run-up to the general election in May as risk-averse investors accumulated so-called M-REITs, driving prices higher. However, the sector has been severely sold down since the US Federal Reserve hinted at quantitative easing tapering in May last year. 

Tan Min Lan, UBS’s head of Asia Pacific chief investment office, wealth management, says Malaysia is the investment bank’s biggest underweight position. “At this point it is very expensive, trading at 16 times forward PE [price-to-earnings ratio] versus the region’s 11.5 times,” she says. “It is expensive relative to its own historical price performance as well as compared to the region.”

She adds that Bank Negara, is probably “one of the most hawkish central banks in the region”, with rates likely to rise because of high household debt and a tight labour market.

Malaysia’s Maybank said in a report that M-REITs face rising costs in the next two years as interest rates rise. Operational costs are also expected to climb with higher fuel prices and the prospect of the implementation of the Goods and Services Tax in 2015, the report said.

In Singapore, investors flocked to so-called S-REITs last year after the ultra-low interest rates resulting from the US quantitative easing programme made other income-generating investments such as government and corporate bonds less attractive. Earlier this year, a number of potential trust issuers were unable to meet investor expectations of higher yields in the new interest rate environment and postponed planned listings. Among the highest profile was Lotte Shopping, a South Korean shopping mall owner, which was expected to seek up to $1bn.

Tan expects REITs to come under pressure as government bond yields rise. Sentiment towards REITs that are invested in Singapore properties has also been hit by measures taken by the city state’s government to cool rising real estate prices, such as raising minimum down payments and increasing transaction taxes, particularly for second homes and non-resident buyers. 

“On the property market, per se, our view has been that the physical real estate market will go through a multi-year period of decline,” she says. “This is a function of firstly, incoming supply, and secondly, very tight policies.”

Atchison says at current valuation, REITs in Malaysia and Singapore aren’t “a raging buy”. “They are fair-valued,” he says.

However, he is positive about the sector in the longer term. The potential for rising rents in the commercial sector and the “sufficiently attractive yield” of S-REITs are likely to win favour with investors even as the tapering of the US quantitative easing programme leads to rising rates. A recent Singapore government study concluded that REITs’ huge collective hold on the real estate market allow them to force rental prices upwards.

The growth potential for Malaysia’s REIT sector is higher than it is for Singapore’s, says Atchison. The country needs to improve its regulation to allow new listings and attract more capital. “Regulatory arbitrage is an issue for Malaysia – they need to make sure that they address the structural issue in order not to lose out to Singapore.”

The TR/GPR/APREA REIT Composite Index in Malaysia has fallen about 3% in the 12 months to June, while in Singapore, the benchmark is up 11.5%.