27 MAY 2018
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.
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.
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.