Property Trust The Malaysian Perspective
Why Real Estate Investment Trust
- Companies unlock balance-sheet values by redeploying real estate assets.
- Real estate can be turned into a liquid asset.
- Earnings that are underpinned by legally enforced leases.
- Greater diversification of income streams.
- Along with tax transparency comes the need for paying out the majority of taxable earnings, thus assuring investors of income.
- REITS generally have lower betas.
What is a Real Estate Investment Trust?
- REITs are investment vehicles which invest primarily in real estate. The Trust's investors (known as unit holders) pool their money in a common fund. This money is in turn used by the Trustee acting on the advice of the Manager, to buy property and other authorized investments.
- All REITs have a trustee, manager and unit holders.
- The Trustee protects the rights of unit holders and ensures the manager complies with the legal requirements of the Trust Deed.
- The Manager is responsible for the Trust's investment strategy and the day to day management of the trust.
A Simplified Structure
Pre-Budget 2005 and Pre-Liberalization by Securities Commission
- No Tax Transparency.
- No RPGT and Stamp Duty waiver for Seller/Purchaser.
- Management company linked to a financial institution.
- 80% of size of listed trust shall be in real property and single purpose companies.
- 75% for unlisted Trusts.
- 2 Year holding period.
- Stringent controls on borrowing/pledging.
Post-Budget 2005 and Post-Liberalization by Securities Commission
- Full tax transparency.
- RPGT and Stamp Duty waiver for seller/purchaser.
- Management company linked to a financial Institution, investment holding.
- Company which has subsidiaries in financial business, property development company, property investment holding company.
- 50% of size of listed/unlisted trust shall be in Real Property and single purpose companies.
- No 2 year holding period.
- Relaxation on borrowing/pledging.
Budget 2012 - Extension of Tax Incentive Period for REITS
- To further promote the development of REITS as well as to encourage the development of the capital and property market in Malaysia, the Budget 2012 has proposed to extend the following existing incentives for another five years;
- The receipt of dividends from REITs listed on Bursa Malaysia by foreign institutional investors, particularly pension funds and collective investment funds are subject to a final withholding tax of 10% from 1 January 2009 till 31 December 2011; and
- The receipt of dividends from REITs listed on Bursa Malaysia by non-corporate investors including residents and non-resident individuals and other local entities are subject to a final withholding tax of 10% from 1 January 2009 till 31 December 2011.
**This proposal comes into effect from 1 January 2012 and will remain until 31 December 2016.
- There are currently 15 REITs listed on the Bursa Malaysia.
- Bigger volume of transaction.
- Rising investability and attractiveness of M-REITs whereby M-REITs have outperformed S-REITs with the listing of Pavilion REIT on 8 Dec 2011,
- Management Company must be a Malaysian incorporated public company.
- Management Company must have a minimum shareholders fund of RM1 Million.
- Management Company must be a subsidiary of a financial services company.
- Property Development Company or a property investment holding company.
- Management Company must have at least 30% Bumiputra equity holding and may have up to 70% foreign equity holding.
Regulatory Requirements - Corporate Governance
- At least 1/3 independent representation on the Board of Directors of the operator.
- At least 2 members of the board are to be independent.
- A director is not allowed to be a director of more than 1 management company.
Regulatory Requirements - What Can Invest In?
- At Least 50% of a listed/unlisted funds total assets must be invested in real property or single purpose company.
- At Least 75% of a listed fund total assets should be invested in real property, SPCs, real property related assets or liquid assets.
- Holding of Securities of, and securities relating to a single issuer - no more than 5% of funds total assets
- Holding of Securities of, and securities relating to group of companies- no more than 10% of funds total assets
- Holding in any class of security of a single issuer -no more that 10% of securities issued
- Generally, property development not allowed
Regulatory Requirements - Investor Protection
- Appointment of Trustee as custodian of assets
- SC approval on value of Real Property for certain types of acquisition
- SC Approval on value of real property on revaluation of properties
- Appointment of Property Management Company to manage to real properties
Regulatory Requirements - Listing
- Governed by the Listing Requirements of Bursa Malaysia
- Must First Receive Prior approval of SC before can be offered to the public and listed
- Firm underwriting agreements must be made for units of a listed fund to be fully or irrevocably underwritten before the public offering of a listed REIT
Where Do We Go From Here?
- With the latest Budget, there will be more players, even International Players
- Already, an Australian Financial Institution is finalizing their M-Reit (Malaysian Reit)
- Local Investment Holding Companies will follow suit, in the likes of Axis Properties (Industrial Based Reit), certain Mall Based companies etc
- Be ready for an explosion of M-Reits
- Call Zerin Properties to start your journey into Reits in Malaysia.