What does REIT mean?

What does REIT mean?


What are Investment Trusts (REITs) and how do they fit in to your investment portfolio?

What are Real Estate Investment Trusts (REITs) and how can they fit into your investment portfolio? With all the buzz about the landmark KL Pavillion REIT unveiled just end of last 12 months, we chart the growth of REITs in Malaysia and unfold the story by using Jennifer Chang, Senior Executive Director of PwC Malaysia.

In 1989, the Amanah Harta Tanah PNB (AHT) debuted on Bursa Malaysia since the first listed property trust in Malaysia with the Amanah Harta Tanah PNB two (AHT2) and Arab Malaysian First Property Trust (AMFPT) following it. Malaysia is among the first in Asia to develop listed property trusts that encouraged small-time investments within the local property sector. Subsequently, the Government announced more incentives and provisions within the annual Budget to boost this sector. These set the scene for what is known today as Investment Trust funds or REITs with the first REIT on Bursa Malaysia becoming the Axis REIT in 2004.

December 2011 saw the 14th in support of premium REIT in Malaysia, the Pavilion REIT, listed on Bursa Malaysia, using the iconic Pavilion KL injected as its most valuable asset.
Though structurally much like unit trusts, REITs are normally traded through stock exchanges. It offers returns to investors through capital appreciation from price changes and annual distributions from investment income for example rental. As a REIT holds rental properties, its main earnings is from rental – usually malls, offices, hotels or commercial buildings. Rental is a fairly consistent source of income, so if your REIT pays out at least 90% of its taxable revenue as distributions to investors, the income stream should be pretty consistent, making REITs very attractive income-generating assets.

Favourable Tax Remedies
The Government has been progressively introducing tax incentives to promote the administrative centre market, including REITs, which is reflected in the fact that many income earned by unit trusts and REITs are exempted from tax. For example, interest on bonds, fixed deposits with licensed banking institutions, gains on sale of investments and foreign sources of income aren’t taxed when received by unit trusts and REITs. Besides which, tax on moving of properties is also specifically exempted.

Whenever a Malaysian REIT acquires properties, it also does not have to pay for stamp duty, normally fixed at a maximum of 3% from the property purchase price. Likewise, sellers of such properties do not have access to to pay real property gains tax (RPGT). The RPGT levy is generally 10% on gains from the disposal of the property sold within 2 yrs of purchase and 5% if sold within two to 5 years. This represents huge savings to the REIT as well regarding the seller of the properties.
In fact, Malaysia was the first country to supply zero tax moving costs to REITs and property sellers, with this southern neighbour, Singapore, following suit to promote their REIT marketplace. Although some REITs may not state a distribution policy of a minimum of 90% of its current year income, the tax structure may actually encourage REIT managers to do this.

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Similar to other countries with a thriving REIT market, the actual Malaysian tax system has provided for tax transparency to Malaysian REITs. This means that as long as a Malaysian REIT distributes at minimum 90% of its current year taxable income, the REIT is going to be treated as tax transparent and would not be levied a 25% tax. This will allow a REIT to declare and distribute income to investors on the gross basis.

Withholding Tax Mechanisms for Greater Transparency
As REITs are usually listed entities, REIT investors can be Malaysians, foreigners, individuals, companies or collective investment vehicles (for example investment funds). Where REIT distributions are made without the REIT paying a 25% tax, Malaysian tax authorities would have a tough time tracking repayment of taxes by investors on such distribution income. This is particularly since it is quite common for investors in a listed entity to alter periodically over the stock exchange.

As such, a withholding tax mechanism has been introduced included in the tax transparency system where the REIT manager has to deduct withholding tax in line with the profile of each investor. After declaring the distributions to traders, the REIT manager would then have to determine who the investor is and deduct the right withholding tax. The Malaysian tax system has provided for the following rates of withholding tax in line with the profile of the investor:

Malaysia has withholding tax levied on payments for example interest, royalties, lease payments and technical fees made to non-residents. This mechanism ensures that the appropriate tax is collected on recipients of income where the amount of tax submission and compliance may be uncertain. Most countries have some type of withholding tax mechanism within their tax system and withholding taxes on REIT distributions is nothing new. Countries like Singapore, america, Canada, Australia, Japan and Germany all have some form of withholding tax mechanisms on REIT distributions too.

In comparing withholding tax rates around the world, the withholding tax rate on REIT distributions with a Malaysian REIT is lower than most countries, except Japan as well as Singapore. For example, Singapore levies a withholding tax of 10% upon distributions to non-resident non-individuals, while individuals pay no tax whatsoever.

Although the Malaysian withholding tax rates on REIT distributions is among the lowest in the world, we will need to reconsider these rates to become as competitive with other regional REITs in Asia.

According in order to former General Electric CEO Jack Welch, ‘an organisation’s ability to understand, and translate that learning into action rapidly, is the greatest competitive advantage. ’ Similarly, in this competitive economic environment, countries – like companies and organisations – are constantly attempting to outdo each other to attract investments. We need to take stock of the other countries are offering and examine how we can offer a far more competitive landscape for the market, including enhancing our existing tax incentives to help promote our REITs market.

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