Tax-Savvy Asians Buy
Into REIT Investments
Real-estate investment trusts are fast gaining popularity thanks to their high dividend payouts
A new type of investment vehicle is gaining ground in Asia: REITs, or real-estate investment trusts. Japan, Korea and Singapore all have launched some in the past two years, and Hong Kong is setting up the legal framework they require.
Now, bankers say that Hong Kong tycoon Li Ka-shing is investigating launching his own REIT in Singapore. Judging by how investors have rushed to get in on his past ventures, that would be a strong endorsement. Cheung Kong Holdings, Li's flagship company, has declined to comment. REITs buy and operate apartment buildings, shopping centres and offices. Shares in the trusts trade on local stockmarkets. They pay dividends based on rental streams and their share prices rise and fall along with the overall property market.
So why not just buy shares in a property company? The key difference, REIT investors say, is in tax. Because they're trusts, REITs don't pay corporate tax, leaving more profits to divvy up among shareholders. To retain that tax-free status, trust laws require them to pay out most of the income that would normally be taxable, generally at least 90% of it, as a distribution to shareholders.
Although REITs date back to the 1960s in the United States and the 1970s in Australia, they are new to most of Asia. Japan got its first REIT in September 2001; it now has six. Korea and Singapore got in on the game last year.
So far, Asian REITs have proved a hit, particularly their high yields--the scale of dividends in relation to the stock price. Take the new Singapore versions, which are both yielding around 8%, based on their IPO prices. Compare that to the 3.2% average dividend yield for the Singapore market.
Capital appreciation, meaning any increase in the stock price, is an extra sweetener -- or drag, if the stock price decreases. CapitaMall, trading around $1.13, is well above its initial public offer price of 96 cents. Ascendas Real Estate Investment Trust, which concentrates on the industrial sector, has been trading in the region of its IPO price of 88 cents.
Borrowing to Expand
CapitaMall has proven so popular that it is issuing new shares so it can buy more properties. It's also borrowed money for purchases; an acquisition made in May brings its debt to about 28% of assets, from 20%. Ascendas REIT's debt, now 20% of assets, looks set to rise to about 25%, also after a new acquisition.
By investing in relatively healthy niche-suburban malls, CapitaMall has managed to do well at a time when the overall Singapore property market is doing badly. That's why investors shouldn't necessarily avoid any Hong Kong REITs that are launched despite a prolonged slump in rental and property values. In the last year alone, office-property values fell another 20%, while property rents fell 25%, according to Jones Lang Lasalle.
"You have to look at the merits," says Chris Reilly, a property-fund manager at Henderson Investments in Singapore and a long-time investor in REITs. "What is the income stream being backed by?" It's possible that in Hong Kong too suburban malls might do well, he says.
For many investors, this type of attention to yield rather than capital appreciation might require some adjustment. "Asians like to think they are seasoned property investors, but they [are used to] investing in a very different time in the property market," when prices boomed each year, says Trevor Cheung, Hong Kong-based head of research at DBS Vickers Securities.
A note to Hong Kong investors: under the proposed code on REITs, Hong Kong
trusts will have to pay corporate taxes on rental income, unlike their
counterparts in other countries. Of course, that could change in the final
draft. But to compensate, REIT dividends will be tax-free to individual
investors, as are all dividends in Hong Kong.
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