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This article first appeared in The Edge Financial Daily on October 27, 2017

KUALA LUMPUR: While Malaysia imposes a lower rate of withholding tax on dividends paid to retail investors of real estate investment trusts (REITs) compared with many other countries, the Malaysian REIT Managers Association (MRMA) is of the view that a total tax exemption should be given to attract more investments.

MRMA chairman Datuk Jeffrey Ng said the association is considering approaching the relevant authorities to seek better incentives for REIT investors.

“A more attractive tax regime will promote more investments in REITs, but our view is more towards the retail investors,” Ng told reporters at the official launch of the Bursa Malaysia REIT Index yesterday.

REITs are typically sought by investors for lower unit price volatility compared with stocks, and for their higher dividend returns compared with bonds. The average dividend yield of the 18 Malaysian-listed REITs stood at 5% last month, compared with 3% for the FBM KLCI.

The government currently imposes a 10% withholding tax on REIT dividends to local and non-resident individual investors. Listed REITs in Malaysia are exempted from annual tax assessment if they distribute 90% of the year’s total income to unitholders.

As a comparison, neighbouring Singapore applies income tax to REIT dividends at a minimum 15% for foreigners. It can reach up to 22% for all individual investors under a progressive tax rate. Both countries apply 10% rate on dividends for foreign institutions.

Ng expects modest-to-flat growth for REITs in the near term, due to the continued subdued residential and commercial real estate market.

“There is much oversupply in the overall property market currently. This is impacting revenues and distribution of dividends,” said Ng, who is also Sunway REIT chief executive officer (CEO).

Axis REIT became the first Malaysian-listed REIT in August 2005 with a market capitalisation of some RM300 million, Now there are 18 trusts — including four syariah compliant REITs — with a market capitalisation of RM44 billion as at Oct 19.

The growth of REITs over the past 12 years, which has resulted in them having their own index, serves as a benchmark for growth in other specialised funds, said Bursa Malaysia Bhd CEO Datuk Seri Tajuddin Atan.

The REIT Index, said Tajuddin, gives investors better access and a clearer view of the segment’s market performance for them to make informed investment decisions.

“Meanwhile, sellers (individual REITs) can view the index as a performance benchmark to be evaluated on its own,” he said. “Having a REIT Index will also provide an opportunity to create an ETF (exchange-traded fund) with the REIT Index as the underlying index in the future.”

This will in turn attract more real estate players to enter the capital market, he added, pointing to alternative REITs in the US with wider portfolios — including exposure to childcare or renewable energy, among others.

Had Malaysia introduced the REIT Index three years earlier, it would show that it has outperformed both the FBM KLCI and the Bursa Property Index by 15% and 26% respectively over the period.

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