Boost for listed REITs

There aren’t many Real Estate Investment Trusts (REITs) quoted on the Bursa Malaysia. In fact, there are only eight (with three more on their way, I’m told):

• Amanah Harta Tanah PNB (AHP),
• Amanah Harta Tanah PNB 2 (AHP2),
• Al-’Aqar KPJ REIT (ALAQAR),
• AmFirst Property Trust (AMFPT),
• Axis Real Estate Investment Trust (AXREIT),
• Starhill Real Estate Investment Trust (STAREIT),
• Tower Real Estate Investment Trust (TWRREIT), and
• UOA Real Estate Investment Trust (UOAREIT).

However, investors in these REITs are giving not a wide grin but a Mona Lisa smile in the 2007 Budget tabled today (1 Sep 2006) in Parliament.

Prime Minister Datuk Seri Abdullah Ahmad Badawi, who is also the Finance Minister, announced that in further diversification of the capital market products to attract investors, the tax on dividends from these REITs will be lowered from the existing 28%.

For the next five years starting 2007, the dividends from listed REITs received by local and foreign individual investors and local unit trust companies will be taxed at 15%. In the case of foreign institutional investors, the withholding tax on the dividends received by them will be 20%.

In addition to the tax rate reduction, Abdullah also announced that the listed REITs are exempted from tax on all income provided that at least 90% of their total income is distributed to the investors.

Though the news is positive, the reduction in tax is not enough to make investors weep with joy. It is still something to be glad about but it merits only a Mona Lisa senyum. Why? Because in many countries, the tax rate is even lower than 15% while a few countries even have full tax exemption for unit trust holders. We’ll have to see when the government will want to throw more goodies at us but this is not really something that I see happening here overnight.

Will this announcement boost the local REITs industry and encourage more REITs to be listed on the stock exchange? We’ll have to wait and see.