It’s officially announced that authorities will not lower the smallest amount of payment ratio that Real Estate Investment Trusts (REITs) should meet in order to qualify for the transparency treatment of tax.
Lim Hwee Hua, the Senior Minister of State for Finance and Transport at a REITs seminar conducted yesterday said, “The key characteristics of Reits as a stable, high-payout, pass-through vehicle are important considerations for investors, and hence, must be preserved”.
“Ministry of Finance and Monetary Authority of Singapore have deliberated this issue and have decided that the minimum payout ratio would not be changed,“ she added.
Under existing guidelines, REITs need to distribute at least 90% of their distributable financial gain to unit-holders, in order to benefit from the tax transparency, which connotes paying corporate tax exemption at the vehicle/REIT, on the part of their distributed income.
She stated that several Singapore REITs secured refinancing either by loans from recapitalisation or sponsors, bank loans, and even at a higher price.
Last month, BT reported that several REIT managers recommended the government to reduce the least amount payment to unit-holders to 50% of the distributable financial gain, while still permitting REITs to benefit from the tax transparency.
These proposals were intended to assist REITs to conserve money. But they showed concerns about REIT investors, as well as institutional players such as funds who rely on the assurance of a regulated least amount of distribution from investments in the S-REIT sector, which may extract from the market if this fundamental appeal of S-REITs fades away.
Mr. Richard Lai, the deputy CEO at Mapletree Logistics Trust, has welcomed the official pronouncement yesterday. Mr. Lai said, ”We have never agreed with any move to reduce the distribution payout ratio because it will destroy investors’ confidence and consequently tarnish the S-REIT market. S-REIT is a special play for investors and reducing the payout ratio would definitely bring into question the very existence of REITs. Why do we need REITs if they don’t have the discipline to maintain high payout ratios?”
However, Mr. David Gerald, the president and CEO of Securities Investors Association of Singapore said, “The 90 per cent rule means that a REIT is always geared. If there is a reserve, the REIT can face economic downturn or financial crisis confidently as banks may not be willing to lend. For this reason, I am not in favour of the authorities insisting that the 90 per cent level be maintained as that may affect the liquidity of a REIT, especially in these bad times”.
Mr. Lai advises that by conserving money, REITs can give options to investors to accept distributions of new units, instead of money. “That could be dilutive but unitholders who support you would understand, whereas if you seek to reduce the payout ratio, you’d be destroying the very nature of having Reits”, he added.
In a speech Mrs. Lim said, “With the credit crunch, many businesses across various sectors are faced with similar refinancing difficulties that S-REITs are facing”. She also said that measures were introduced by the government in order to arouse businesses, as well as $5.8 billion worth of measures to fuel up bank lending including the Special Risk-Sharing Initiative.
Additionally, S-REITs can tap measures by Singapore Exchange in order to help the secondary fund-raising efforts of the listed issuers. “SGX will continue to explore other initiatives to facilitate secondary fund raising, including the Australian accelerated rights issue structure, which requires a more detailed study”, Mrs. Lim said.