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INDIA and China are both developing frameworks for real estate investment trusts (Reits), but the threat to Singapore's position as a major regional Reit centre may be a distant one.
Both have size in their favour, but there are still serious issues standing in the way, Reit watchers said. India could be rolling out the necessary legal and taxation framework to kick-start its Reit market as early as the middle of this year, with China doing so in 2017.
No one will dispute the enormous quantity of assets that can potentially be securitised in these two markets.
KPMG, Knight Frank and Hariani & Co put the "reit-able" amount of commercial real estate in India at nearly US$96 billion (S$130 billion).Cushman & Wakefield estimates conservatively that China's "reit-able" market size could be "somewhere around 100 trillion yuan" (S$22 trillion).
In comparison, Singapore's 28 Reits and six stapled trusts contain about S$100 billion in assets altogether - built up over 13 years since 2002. Overseas assets make up just over a quarter of them.
With such large asset bases, the two markets could possibly divert institutional investors and international listings from Singapore, especially if the sponsors own Indian and Chinese assets, RHB analyst Ong Kian Lin said.
Nevertheless, both countries need first to set up robust legal and tax regimes for Reits, he added.
India is still in the midst of shaping its framework. China is still without a draft of Reit legislation despite a decade of discussions and stalled plans.
Peter Verwer, CEO of Asia-Pacific Real Estate Association (Aprea), said the outcome could swing either way for India and China: "Either it will be the party that nobody turns up for unless the tax rules are tweaked, or it will be an exciting new year for Asian Reits."
Singapore, though, has had a good headstart over these two markets, and ample time to build up clear regulatory and tax frameworks.
"Both China and India have relatively complex tax regimes compared to Singapore. Tax costs for transfers of real estate to Reits are generally higher than in Singapore," said Leonard Ong, head of real estate tax advisory at KPMG in Singapore.
Currently, sponsors in China and India face high costs if they want to sell their assets to a Reit. This makes it harder for Reits to make yield-accretive acquisitions, he said.
Chinese sponsors who transfer their real estate to Reits in China have to contend with enterprise income tax on transfer gains, business tax, land appreciation tax and stamp duty. Similarly, Indian sponsors who transfer their real estate to Reits in India have to pay high corporate income taxes on gains and relevant transfer taxes, he said.
India is trying to improve matters. In its budget last month, it tried to promote more tax transparency by removing tax on Reits' rental income from directly held properties, charging these taxes at unitholders' distributions only. It also scrapped the long-term capital gains tax for Indian sponsors selling shares of their Indian property holding companies to Reits.
However, it continues to tax gains (under its so-called Minimum Alternate Tax provisions) from the exchange of shares of a property-holding special purpose vehicle (SPV) against units of a Reit, as well as dividends paid by an SPV to its parent Reit.
This did not sit well with listing aspirants. One real estate developer, Phoenix Mills, said it cannot afford to wait and will work on a commercial mortgage-backed securities issue to raise debt against its assets instead.
India is unwilling to give tax breaks partly because this would have huge revenue implications, said Reit Association of Singapore (Reitas) CEO Sonny Tan.
"The issues of capital gains tax and dividend tax will be painful for most governments to do away with, even if they can afford to fiscally over a short period. Yet these are so basic and essential to attract Reits."
Nevertheless, observers say both countries are motivated to craft a successful Reit framework.This will allow property-owning private equity players an exit opportunity. Debt-laden developers can also reduce the gearing on their balance sheets and raise capital. Foreign money can also be attracted into real estate.
There are also social objectives. For India, Reits may help to attract investments to execute national policies such as its "100 Smart Cities" plan. For China, it can help the government shoulder some of the financial burden of building public rental homes.
China has selected four cities - Beijing, Shanghai, Guangzhou and Shenzhen - to pilot the Reit programme.It is unclear if the pilot programme will be extended to other types of properties, but one problem with rental housing is its low return rate. China Daily cited a CBRE analyst putting the rate of return at 1 per cent, far below the 6-8 per cent that most global Reits yield.
Reits in India and China might also not be attractive as yield plays because of high interest rates in these markets, which make it hard to offer an attractive yield spread over risk-free government bonds.
Singapore Reits' current yield spread is about 380 basis points (bps). Their distribution yields are at 6 per cent, compared to 10-year government bond yields of 2.2 per cent.
In comparison, India and China's 10-year government bonds are yielding about 7.7 per cent and 3.5 per cent, respectively.
Nicholas Koh, an analyst at OCBC fixed income research, said: "Domestic borrowing costs in China are also high. In addition, there are other high yielding investment products such as trust products which compete for investor appetite."
Fitch Ratings added that many of China's commercial investment properties are also of poor quality and will probably yield less than 4 per cent. Offset by high borrowing costs of above 6 per cent, this would leave little profit for unitholders.
"In such an environment, Reits become pure capital appreciation plays," the credit rating agency said.
As for India, Teo Wee Hwee, real estate tax leader at PwC Singapore, said that domestic investors already get 8-10 per cent interest rates from bank deposits. In order to attract them, Reits will have to give a higher return of 10-12 per cent, which means the sponsor may have to sell the property at deeper discounts for the Reit to meet that yield. India Reits might thus find more traction with foreign investors.
Asset quality may also be a problem. Many developers and funds in India are keen on a Reit market to offload their properties because they are desperate for refinancing.
"There are sponsors out there that see Reits as a way for them to divest assets that they don't want, and they will keep the good ones for themselves," said PwC's Mr Teo.
"India might be so eager to kick-start its Reit market that it might be more lax in its listing criteria, such that those who desperately want to list will find it an easy avenue."
For now, Mr Teo concedes that it is difficult to do a full-fledged analysis on the threat India and China's fledgling Reit markets pose to Singapore, in the absence of concrete frameworks.
Reitas president Chua Tiow Chye agreed. He said: "We would not really know the verdict until the governance, tax, capital market, debt market and listing requirements are made clear and can be analysed.
"But we believe on all counts that Singapore is still the most attractive Reit market in Asia for cross-border listings."