SGX still in talks on potential tax waiver on Reit ETF

Singapore

THE withholding tax incurred by exchange-traded funds (ETFs) tracking real estate investment trusts (Reits) is a major bugbear for potential issuers of this instrument. Singapore Exchange (SGX) is thus in talks with the relevant authorities on a potential tax waiver for such a product.

This was revealed by SGX head of research and products Chan Kum Kong in an interview after the maiden listing of a Reit ETF on the Singapore bourse on Thursday. "On the outcome, I definitely can't comment on that but we do recognise this and we have raised the issue," he said. "We are getting feedback from potential issuers that they are holding back their efforts because of this differential in potential returns."

But even so, there is still a "good pipeline" of Reit ETFs that is underway, he added. Touting this as a product with the benefit of diversification and stable returns, Mr Chan said SGX is talking to a number of potential issuers.

Besides being the first Reit ETF to be listed here, Phillip SGX APAC Dividend Leaders Reit ETF also marks other "firsts". It is the first Reit ETF to cover 30 listed Reits in the Asia-Pacific ex-Japan - including 14 SGX-listed Reits - and is the first to be dividend-weighted rather than capitalisation-weighted. This means the investment allocation of the ETF is based on absolute dividends in dollar terms. It is also a dual currency ETF that can be traded in either Singapore dollar or US dollar.

Reflecting strong demand, this Reit ETF issued at US$0.933 has raised more than US$30 million mainly from local investors at its first closing. One-third of the investors are retail investors while the rest are institutional investors.

As a general principle, Singapore Reits enjoy tax transparency on income from Singapore properties. But for an ETF tracking Reits, income distribution from S-Reits' properties in Singapore will be subject to a withholding tax of 17 per cent. As a result, the subsequent distribution by the ETF to individual and foreign corporate investors would be lower than what they could gain from investing directly in the Reits.

According to Leonard Ong, head of real estate tax advisory at KPMG in Singapore, one way to mitigate the tax issue for such investors would be for the Inland Revenue Authority of Singapore (IRAS) to waive the withholding tax when distributions are paid out by the Reits to the ETF, and arrange for the tax to be collected at the ETF level.

Mr Chan said that launching a pure Singapore Reit ETF is "taking longer than anticipated", with the withholding tax on income generated from S-Reits being one of the major kinks being ironed out. But Phillip Capital Management managing director and chief investment officer Jeffrey Lee noted that while there has been some market rumblings about the withholding tax on Reit ETFs, the estimated impact on returns for Singapore investors is 25 basis points, which is "not significant in the context of a long-term investment". The customised index for the ETF has shown an annualised return of more than 12 per cent over the past five years.

Under the index, Singapore Reits account for 30 per cent of the total dividends paid out by the 30 Asia-Pacific Reits. Australia Reits make up a larger 60 per cent while Hong Kong Reits account for the balance.

Phillip Capital is still keen to issue an ETF that tracks only Singapore Reits. A waiver of the withholding tax on Reit ETF will "give us the impetus to come up with a fund of Singapore Reits", Mr Lee said.

The newly listed Asia-Pacific Reit ETF is expected to yield around 5 per cent in dividends, or 4.5 per cent excluding the 0.5 per cent charged for management fee. "In the days to come, we could expect more attention now that it gets listed," Mr Lee said. He noted that there are many insurance companies in Japan and Taiwan, for instance, that will not meet return requirements by just buying into government bonds in this low or negative interest rate environment.

Mr Lee also stressed that the Asia-Pacific Reit ETF does not merely look at Reits that pay the highest dividend yield but selects the larger and established Reits with the ability to pay dividends during both good and bad times.

Since the assets under management raised by the physical ETF will be invested in the underlying Reits, the liquidity impact on Reits is going to be very positive, Mr Chan added.

A total of 886,800 units listed in US$ changed hands on Thursday with an average trade size of 15,031 and closing at US$0.931. Some 687,300 units listed in S$ changed hands, with an average trade size of 8,700 and ending at S$1.294.

Of the total of 42 Reits and property trusts listed on SGX with combined market capitalisation of more than S$75 billion, about one-quarter of the shares are held by retail investors.

Phillip Capital had in 2011 launched Singapore's first Reit fund known as Phillip Singapore Real Estate Income Fund, which has reaped annualised returns of more than 10 per cent over the last five years.