Singapore REITS Deliver Impressive Returns Despite Lacklustre Property Market

by Mary Swire, Tax-News.com, Hong Kong

19 May 2005

While property prices in Singapore have struggled to recover from the Asian financial crisis of 1997/1998, investors in real estate investment trusts (REITS) listed on the city-state's stock exchange have enjoyed bumper returns since the vehicles were introduced three years ago.

For example, investors who bought into the CapitalMall REIT when it was listed in 2002 would have earned a 100% return on their investment, based on the appreciation of its stock-price. The company's dividends also yield a healthy 4.3%.

CapitalMall invests in income-producing retail properties in Singapore. Income is mainly derived from rental payments received from a diverse range of over 1,000 leases from local and international tenants. It currently has a portfolio of five major shopping malls in both the suburban and city areas.

Last month, the firm announced distributable income of S$29.8 million (US$18 million) for unitholders for the period from 1 January 2005 to 31 March 2005. This is an increase of S$2.0 million over the forecast of S$27.8 million.

“CMT has once again exceeded forecasts to deliver higher returns to unitholders," commented Mr Hsuan Owyang, Chairman of CMTML at the time of the announcement.

"The continuous appreciation in CMT’s share price since IPO, including the 15% increase in the first quarter, demonstrates the high level of confidence in the performance of CMT," he added.

These results have been achieved against the backdrop of a relatively lacklustre real estate market. Residential prices rose by just 0.9% during 2004 and have increased by 0.7% year-on-year during the first quarter of 2005, according to the Urban Redevelopment Authority. Meanwhile, the price of office space increased by 1% quarter-to-quarter during the latest period, compared with a 0.7% increase in the previous quarter.

However, more importantly, office rents have been rising at a faster pace, averaging a 2.2% increase in the first quarter compared to the final three months of 2004. Retail rents rose 1.7% during the first quarter of 2005 compared to the previous quarter which followed a 0.8% increase from the third to the last quarter of 2004.

Based on current share prices, Singapore's REITs offer annual-dividend yields of 4.3% to 5.5% which compares to a forecasted 4% average dividend payout from Singapore-listed companies this year.

Another Singapore-listed REIT that has been performing well is the Fortune REIT, a property fund controlled by Hong Kong billionaire Li Ka-shing, which invests exclusively in Hong Kong property. Fortune's net property income rose 2.8% compared to the same quarter a year ago and the firm's tax-exempt yield was 5.32%, or 6.44% on a pre-tax basis - the highest of any REIT listed in Singapore.

Clearly looking to the future with some confidence, Fortune announced last week that the Singapore Exchange has approved its plan to raise HK$2 billion (US$257 million) to fund the acquisition of six Hong Kong shopping malls.

However, some analysts have expressed a more cautious view of Singapore's REIT sector, noting that its continuing popularity has squeezed yields in CapitalMall, almost halving as the share price has risen from 96 cents at launch to around S$2.30 at present.

"As investors become familiar with REITs as an investment instrument and with pro-REIT guidelines introduced by the government at the recent budget announcement, there has been yield compression across the REITs industry in Singapore," Mr Hsuan acknowledged.

In his 2005 budget speech, Prime Minister and Minister of Finance, Lee Hsien Loong announced that foreign non-individual investors would be encouraged to invest in the Singapore property market with a proposed reduction in the withholding tax on REIT distributions to 10% from 20%, for a period of five years.

Additionally, to attract more REIT listings, the government wants to waive stamp duty on the instruments of transfer of Singapore properties into REITs to be listed, or already listed on the SGX, for a five-year period.

Real estate investment trusts (REITs) are companies that own and most often actively manage income-generating commercial real estate and most are publicly traded.

In most countries where REITS are traded, the majority of a firm's income is passed onto investors without taxation at the corporate level. In Singapore, REIT dividends are tax-free provided more than 90% of the firm's income is distributed to investors. All five of the city's listed REITS have chosen to do this.

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