SGX sets its sights on first ETF for Singapore Reits

Singapore

THE local bourse operator is aiming to have an exchange-traded fund (ETF) for Singapore real estate investment trusts (Reits) (S-Reits) launched in the second half of this year, in what would be a first for the sector here.

That was disclosed by Singapore Exchange (SGX) head of research and products Chan Kum Kong in an interview with The Business Times.

Speaking to BT on the sidelines of the Reits Symposium 2016 last Saturday, Mr Chan said: "We have been working with a couple of issuers to launch an S-Reit ETF for investors but, more specifically, with the aim of providing (through the ETF) a retirement solution for retail investors here."

The ETF will track the performance of the SGX S-Reit 20 Index launched last December, which measures the performance of the 20 largest and most tradable S-Reits listed on the local bourse.

Though it has yet to secure regulatory approvals due to "details still being hashed out with issuers", Mr Chan is "cautiously optimistic" about getting the ETF rolled out in the second half of this year.

With 36 Reits listed on the local bourse (37 soon, with the imminent launch of a S$902 million IPO by Frasers Logistics and Industrial Trust this Friday), Reits remain a "favourite of investors" as the asset class "consistently edges out indices like the Straits Times Index", Mr Chan said.

At a total market capitalisation of S$65 billion, Singapore has the third-largest Reit market in Asia Pacific after Australia and Japan, according to data from the Reit Association of Singapore (Reitas).

Figures released by SGX last week showed that 27 Reits and six stapled trusts listed here posted an average distribution per unit growth of 1.8 per cent in the first quarter of this year, when compared to year-ago figures.

That's why, Mr Chan noted, an S-Reit ETF would be welcome. He said: "Even from a national agenda standpoint, there are many benefits. A Reits ETF is what we need; we have an ageing population, so we need to help people grow their retirement funds. Couple that with the strong demand among investors here for Reit products, if we are able to wrap the ETF label around S-Reits by reducing the need for them to choose which Reit to buy, we will have a great solution."

However, there are snags in the process of launching the ETF, chief among which is the taxation issue.

A senior executive at an asset management fund who is looking into issuing an S-Reit ETF told BT: "The thing is that, right now, the tax regulation in Singapore is such that any Singapore fund which buys into an S-Reit will have to pay a 17 per cent withholding tax when it gets dividends. Individual investors, in contrast, do not get taxed on S-Reit dividends."

The executive and his fund declined to be named. "So the situation is that it would be an administrative issue if we have to pay the tax on every dividend we collect," the executive added.

One way to mitigate the issue would be for the Inland Revenue Authority of Singapore (IRAS) to waive the withholding tax when dividends are paid out by the Reits, and instead arrange for the tax to be collected at the ETF level.

Such a taxation structure "can be done, on a practical basis, and IRAS doesn't lose any revenue", the executive said.

Yet, despite the taxation issue, DBS head of property research for Singapore Derek Tan remains upbeat on the ETF's prospects.

"If they can get past the tax issue, then an ETF would be great, as it would provide a low-cost alternative to local investors, as compared to investing directly in the Reits," Mr Tan said.

"The ETF would also appeal to foreign investors who are new to the market, along with foreign firms in countries like Thailand and Indonesia who do not have a domestic Reit regime. With competition heating up, the ETF would raise the profile of S-Reits positively."

At the Reits Symposium, a panel of industry experts (including Mr Chan and Mr Tan) emphasised the importance of investing in Reits as a way to grow one's retirement funds.

Said Reitas chief executive Sonny Tan: "A lot of people may not be fully aware, but today's Central Provident Fund (CPF) rules allow them to invest in Reits . . . You keep your money in CPF and you don't get to take it out until you are 55, 62, and you get an interest rate of 2.5 per cent.

"That is good, but Reits give you a return of 5, 6, 7 per cent instead, and with the power of compounding, your million dollars come quicker."

The symposium was organised by financial portal ShareInvestor, a subsidiary of Singapore Press Holdings.

Said Mr Chan: "I might be conservative about this, but looking forward, I think we should be looking at getting as much liquidity as we can from the region into our Reits. We have a first- mover advantage, and if we are able to augment that with an ETF to lock in our liquidity, overseas Reits that want to list in their domestic markets will think twice.

"But if we don't add liquidity to our ecosystem, then somebody else can copy what we have very quickly."