REITs

REITs: The 2015 budget announced some changes to S-REITs, summarized below:
1. NOT extended – 3% stamp duty waiver on transfer of property into listed/to-be-listed SREIT
2. Extended – till 2020, 10% concessionary income tax rate for non-individual foreign investors
3. Extended – till 2020, tax exemption on income derived from overseas assets
4. Extended and enhanced – till 2020, GST remission to claim input tax, enhanced to include fund raising business expenses of SPVs of SREIT/SBTs

By estimates, the absence of 3% stamp duty concession, beginning April 2015, will reduce entry asset yields by 10-20bps, forcing sponsors to be more conservative in pricing in order for the acquisition by SREIT to be DPU-accretive initially.

At the same time, the move could completely eliminate inorganic growth potential for smaller REITs, which have limited acquisition opportunities to begin with.

On the brighter side, it levels the playing field between REITs and non-REIT property players and between Singapore assets and overseas assets.

We expect intensified competition for Singapore assets and increased interests in overseas properties. However, the latter will eventually raise the risk premium on SREITs.

On the labour front, foreign worker levies increases are deferred by one year, hospitality REITs are the biggest beneficiaries of such.

Overall sentiments in view of budgetary changes are expected to be neutral to positive. Pent-up buying demand from investors seeking policy clarity – especially on the tax exemption on income from overseas properties – may be released.

Counters deriving a significant portion of their income from overseas assets that appeared depressed recently due to policy uncertainty are CapitaRetail China Trust, Ascott Residence Trust, Mapletree Logistics Trust, CDL Hospitality Trust and Frasers Commercial Trust.