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Friday, August 29, 2008

Taxation regime for REITs (Real Estate Investment Trust)

WOULD a tax regime in a country be able to promote the real estate investment trust (REIT) industry? Malaysia currently has 13 REITs in the market (compared with 19 in Singapore and seven in Hong Kong).

The following are the overriding salient features of the tax regime in Malaysia for REITs.

Jennifer Chang

Tax transparency

This refers to the REIT not being subject to income tax and in Malaysia, this applies so long as the REIT has distributed at least 90% of its taxable income to investors for the year. This lessens the administrative burden at the REIT level since tax is not paid by the REIT.

Taxing investors directly at the tax rates applicable to them also leads to a more efficient method of taxation.

Withholding Tax (WHT)

Where tax transparency applies, the REIT will have to deduct WHT on distributions made. (See table)

Malaysian corporate investors continue to be taxed at the current corporate tax rate of 26% upon submission of their annual tax returns. Is the tax regime in Malaysia attractive enough for fund managers to locate REITs in Malaysia for regional investments?

Tax incentives

Malaysia has generous tax incentives for unit trusts and REITs. Stamp duty on property purchase by REIT has been exempted and, generally, most investment income earned by the REIT is not subject to tax.

These include interest from fixed deposits and bonds, gains from sale of investments and foreign sourced income which can be distributed as tax-exempt distribution to investors.

The WHT levied on the taxable rental income represents the bulk of a REIT’s revenue. Are WHT rates in Malaysia competitive?

If the investor is a pensioner or a tax-exempt body, the WHT of 15% is not equitable since they are mostly not subject to income tax.

High net worth individuals are better off since the WHT at 15% would generally be lower than what they usually have to pay.

Generally, most companies in Malaysia should not be worse off since rental income would be taxed at the normal corporate tax rate anyway.

Naturally, one can infer that this REIT tax framework was specifically crafted to attract specific investors or could merely be in tune with the existing investor profile for REITs in Malaysia.

The main question for foreign institutional investors is who would be eligible for the reduced WHT rate of 20% and whether specific application has to be made for each foreign institutional investor.

Although the term foreign institutional investors has been described to incorporate pension funds and collective investments funds, the breadth of investors to be included in this term has not been specifically identified.

Although the tax transparency system is meant to be a more efficient system for REITs, having various rates for various categories of investors means the administrative burden appears to have shifted to the fund manager, who has to have a very good tracking system to determine which portion of distribution has to be subject to WHT and which rate to apply.

With thousands of investors who buy and sell at any point in time, information on each investor may not be so easily tracked.

In comparison, Singapore’s WHT rates for REIT investors are simplified, i.e. individual investors are not subject to WHT while all corporate investors are subject to a reduced WHT of 10%. This simplifies the process for fund managers and the lower WHT helps promote REITs in Singapore.

It is important to note that individuals and foreign investors in Malaysian bonds do not incur any WHT on the interest or profits received. Therefore, providing the reduction in WHT would certainly put REITs in a better position. In this competitive environment, more can be done to enhance the industry and the streamlining and reduction in WHT would provide a boost to this industry.

The writer is senior executive director at PricewaterhouseCoopers Taxation Services Sdn Bhd

By The Star

Glomac reviewing property launches

KUALA LUMPUR: Glomac Bhd is reviewing its property launches given the current challenging environment of inflationary pressures and the slowdown in demand for medium-range residential properties.

Managing director Datuk F.D. Iskandar said the company was relooking at some of its medium-range residential properties.

Glomac Berhad group executive chairman Tan Sri F.D Mansor and group managing director Datuk FD Iskandar at the press conference on Thursday.

“We find the margins have been squeezed,” he said after the company AGM yesterday.

However, he said, the company would still continue with the launch of its high-end niche projects as the takeup rate of such projects had not been as badly affected by the current situation in the market.

“With such volatility in construction material prices, it has not been an easy operating environment for us.

“Nevertheless, we are pleased to have achieved a favourable set of results for the year and, more importantly, our recent launches have been well received,” he said.

While the group enjoyed brisk sales of its township developments, Bandar Saujana Utama and Saujana Rawang, its commercial project in Sri Hartamas, Glomac Galleria, and the initial phases of its gated development in Bandar Sri Bangi were fully sold out within months of being launched, he said.

For the financial year ended April 30 (FY08), including the en bloc sale of Glomac Tower, the group achieved record sales of RM916mil, and unbilled sales stood at a high of RM667mil.

Iskandar said the RM650mil mixed development, Glomac Damansara, would likely be launched in the next quarter.

“The first phase will comprise shop/offices and an office block.

“We are also very excited about the new land bank we secured. We believe this latest phase of Plaza Kelana Jaya, where Restaurant Kelana Seafood Centre was formerly sited, offers strong potential for another commercial development. We expect to launch this project in 2009,” he said.

At present, the company has about 1,000 acres of land bank, with a gross development value of about RM3.5bil.

The company yesterday announced its latest unaudited revenue of RM71.6mil and pre-tax profit of RM4.9mil for the last quarter ended April 30.

For FY08, the group registered 10.4% growth in revenue to RM323.9mil, driven by contributions from Suria Stoner and Plaza Glomac.

It reported pre-tax profit of RM50.2mil and net profit of RM35.1mil, an increase of 9% from FY07.

On plans for further joint ventures, Iskandar said the group had been invited by the Al Batha Group of the United Arab Emirates to diversify into the Middle East.

By The Star

Glomac sees KL projects boosting 2009 earnings

GLOMAC Bhd expects to improve its net profit in fiscal 2009, thanks to sales of its Glomac Tower and Suria Stonor projects in Kuala Lumpur.

The property developer made net profit of RM35.1 million in the year ended April 30 2008, on revenue of RM324 million.

However, sales of properties costing below RM300,000 are affected by higher prices although demand for high-end properties is still firm, group managing director Datuk F.D. Iskandar said.

ISKANDAR: More launches over the next one year

"With more launches over the next one year, there should be more sales. But we will look back at figures in terms of profitability," he said after the company's shareholder meeting in Kuala Lumpur yesterday.

Glomac has raised by 20 per cent the prices for properties costing below RM300,000 at its townships in Sungai Buloh, Rawang and Johor.

"Margins are squeezed by higher construction cost, which has gone up by 30 per cent. By raising the selling price, it has affected sales," Iskandar said.

Glomac has 400ha in Sg Buloh, Rawang and Johor, with earnings potential of RM3.5 billion.

While the three townships may not do well this year, Iskandar said he was confident of sales for its seven other projects.

Glomac has pockets of land in Selangor. It aims to launch Glomac Damansara, an integrated project, a commercial complex at the site of the former Kelana Seafood Centre in Petaling Jaya, and two office towers and a serviced apartment block in Mutiara Damansara for RM1.1 billion.

Group executive vice-chairman Datuk Richard Fong was optimistic that margins from high-end properties would cushion rising costs.

Glomac has plans to venture to the Middle East.

Fong said it may do this through its partnership with Al Batha Real Estate Co of the United Arab Emirates or with other developers in the region.

By New Straits Times (by Sharen Kaur)

Sunrise pays RM179m for land near Petronas Twin Towers

SUNRISE Bhd may carry out a mixed development project on a piece of prime land opposite the Petronas Twin Towers where Wisma Angkasa Raya now sits.

This could include hotels, offices and service apartments, executive chairman Tong Kooi Ong said in a briefing in Kuala Lumpur yesterday.

Plans will be finalised by the third quarter of 2009.

"We'll get the best architects to come up with an iconic structure," he said.

The property developer, under a deal with Reliance Pillar Sdn Bhd and Lembaran Segimaju Sdn Bhd, will pay RM179 million for the 69,171sq ft land on which the building is situated, or an equivalent of RM2,588 psf.

That price is a record for land bought for redevelopment in the Kuala Lumpur City Centre area.

Wisma Angkasa Raya, which is around 29 years old, is Kuala Lumpur's first high-rise office building. The unencumbered property is a 24-storey commercial building comprising a 20-storey office tower and a four-storey podium with two basement carparks.

It has a total net lettable area of 167,728 sq ft and an occupancy rate of 96.4 per cent.

Sunrise reported a net profit of RM45 million for the fourth quarter to June 30 2008, a 28 per cent jump from the same quarter a year ago.

Revenue improved 48 per cent to RM258 million.

Sunrise has a dividend policy of 35 per cent of the group's profits but for the financial year ended June 2008, there is no cash dividends.

"We've already informed shareholders that Sunrise bought shares from the open market and gave out treasury shares in lieu of cash," Tong said.

By New Straits Times (by Ooi Tee Ching)

BLand signs pact to develop golf resort in Libya

KUALA LUMPUR: Berjaya Land Bhd (BLand) has entered into a memorandum of agreement with Libya’s Economic and Social Development Fund (ESDF) and the OYIA company to develop an integrated golf resort cum residential and commercial development in Libya.

The proposed project would be developed in phases with the Libyan government agreeing to bear the infrastructure costs, BLand said in a filing with Bursa Malaysia yesterday.

BLand would prepare the master plan for the project and with the assistance of the ESDF and OYIA, submit it to the relevant Libyan authorities for approval.

“The total estimated development costs for the project is to be determined upon completion of the feasibility study of the master plan.

“It is expected to be funded from internally generated funds and/or borrowings of the BLand group, the actually composition of which will be determined at a later stage,” BLand said.

By Bernama

MRCB sees better results in fourth quarter

KUALA LUMPUR: Malaysian Resources Corp Bhd (MRCB) expects a better fourth quarter on the back of moderating construction and building material prices, says group managing director Shahril Ridza Ridzuan.

Shahril Rodzha Ridzuan

The group posted a net loss of RM5.2mil for the second quarter ended June 30 amidst soaring construction costs, which resulted in substantially reduced margins despite a substantial increase in revenue to RM228.5mil from RM96.6mil in the previous corresponding period.

Due to accounting standards, Shahril said the company had to take into the books any possible increase in cost in its second quarter results even though the group was seeking variation-of-price compensation for some of its ongoing projects.

“The third quarter will still reflect the impact of the increase in electricity tariffs and fuel prices, which rose fairly high during the quarter,” he said after the unveiling of MRCB’s first Global Reporting Initiative (GRI)-based sustainability report on Wednesday.

MRCB has deferred some of its property launches until such time when material prices stabilise and the company is able to properly account for project costs.

“The price points of our projects will move up in tandem with rising building costs. New launches will have price adjustments to reflect those changes,” Shahril said.

On developments in the Middle East, he said the company had started work on a project in Saudi Arabia. “It’s something very similar to what we are doing at KL Sentral and Penang Sentral,” he said, adding that the project was still in the early design phase.

On its sustainability report, Shahril said: “We look at this report as an important first step to make sustainability a core value at MRCB. We are committed to transparency and making this information available to the public as we work towards our goals.”

The sustainability report includes key indicators on the group’s environmental and social governance performance.

It also highlights the importance of sustainable development as part of the group’s broader agenda, based on the G3 guidelines which have been harmonised with the United Nations Global Compact and other tools.

By The Star