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News & opinion

27 MAY 2018

What must be done to advance Indonesian REITs?

At the RICS-MAPPI Valuation Conference 2018 in Jakarta, Robert Andriessen, Andriessen Consulting, gave a thought-provoking talk about Real Estate Investment Trusts (REITs) in Asia, with a summary of the barriers to more REITs being listed on the Indonesia Stock Exchange (IDX).

During his speech, Robert highlighted that REITs are listed in around 30 countries worldwide, with Australia, Japan, Singapore, Hong Kong, and Thailand being the largest REIT markets in Asia. Currently, Indonesia has one listed REIT; however, many REITs listed overseas hold Indonesian stock within their portfolios. As such, a lack of quality real estate is not a barrier to local REIT market expansion. So, what is? To answer that question Robert summarised the main advantages and disadvantages of a REIT, and compared REITs in four Asia-based markets.

To answer that question Robert summarised the main advantages and disadvantages of a REIT, and compared REITs in four Asian-based markets.

The advantages of REITs

  1. As well as long-term capital gain that can be leveraged in the future, REITs offer ongoing dividend income.
  2. REITs allow investors to place their money in diverse portfolios of asset classes.
  3. As REITs trade regularly on the major exchanges, they offer liquidity to investors.
  4. Investors do not need to worry about direct management, as professional portfolio management is part of the fund.
  5. Generally, assets within the funds are underpinned by long-term leases, generally to stronger covenants, thereby securing longer-term income and minimising voids.

The disadvantages of REITs

  1. As REITs are publicly traded, unit prices can fluctuate quickly.
  2. Investment growth is generally slower than direct investment in real estate.
  3. Tax rates on dividends are not always investor friendly.
  4. Leverage ratios may be increased by a REIT manager to maintain the attractiveness of the fund.
  5. REIT management fees can often be high, which impacts overall return.

While most of these advantages and disadvantages are relatively global, the impact of dividend taxes can be significant. For example, two of the biggest markets in the region, Singapore and Hong Kong, have a zero-tax rate on dividends. Compare this with Indonesia at 15% and the offering looks less attractive to REIT investors.

We see a similar disparity when we look at deposit rates, with rates in Singapore, Hong Kong and Thailand ranging from 0.75%-1.5%, while Indonesia sits at around 5.5%-6%. If we then look at the dividend yield of a REIT across Hong Kong, Singapore, Indonesia and Thailand, we see a broad average return of around 6-7%.

Clearly, we have a scenario in Indonesia where the yield return is essentially offset against the deposit rate, coupled with a high-dividend tax rate. This does not make for a particularly attractive investment, especially when one considers that the risk is considerably higher than a 10-year government bond yield, which currently sits at 7%.

This makes the proposition of REITs in Indonesia highly unattractive.

What can be done?

Collaboration between regulators, the tax office and the IDX to create a smooth entry process to REIT listing, coupled with a beneficial tax regime, would make Indonesia a more attractive REIT market.

However, this in isolation is not enough. Until interest rates reduce substantially the investment return against the cost of borrowing is simply not an attractive prospect.