In the Budget 2007,the proposed tax incentives for real estate investment trusts (REITs) are as follows:

• from January 1 next year, non-corporate investors, especially resident and non-resident individuals and other local entities which receive dividends from REITs listed on Bursa Malaysia, will be subject to a final witholding tax of 15 per cent for five years.( earlier 28%);

• For foreign institutional investors, especially pension funds and collective investment funds that receive dividends from REITs, they will be subject to a final withholding tax of 20 per cent for five years. (earlier 28%) and

• In addition, the tax treatment for REITs is further improved whereby the undistributed income from REITs is exempted, provided REITs distribute at least 90 per cent of their income.
  
  

However, compared with markets such as Singapore, Australia, Japan and Hong Kong, Malaysian REITs (MREITs) still lag behind in terms of tax transparency and attractiveness to both local and foreign investors:

Reit Regulation:

(a) HIGHLY Transparent:

(b) Transparent:

Source : Axis Reit Managers Bhd/ The Star 9/9/06

The aforesaid tax incentives have drawn some constructive comments from various local Reit experts:

(a) CIMB associate director (equity capital markets) Azhar Mohd Zabidi:

• the new incentives fell short of market expectations and did not create any major impact;
• Malaysian Reit is still way behind other more developed markets, including Australia and Singapore, which have totally exempted tax on dividend income received by individual investors.
• new tax structure was complicated as it provided a dedicated regulatory requirement for different types of investors

(b) Axis REIT Managers Bhd executive director Stewart Labrooy:

• the raising of the gearing limit to 50% gave more flexibility to MREITs in making acquisitions and this should be exploited;
• Malaysia are still small compared with other countries. Japan is now a US$34bil industry while Singapore’s REIT market capitalisation is worth S$14bil and
• the need for more government-linked companies to unwind their property portfolios into REITs and recycle their capital, which will give an added boost to the growth of our economy,
• There is also a need for acquisitions of properties to be concluded more quickly while restrictions on foreign ownership of Malaysian assets need to be relaxed to attract more foreign investments in the property sector.
• the local REIT industry is still small in size and does not have sufficient liquidity to attract the interest of foreign funds;
• While Malaysia lags behind its Singapore, Hong Kong and Japan in terms of tax transparency, the country ranks among the top five in terms of regulatory framework with Australia, Singapore, Hong Kong and Japan, thanks to the Securities Commission’s pro-active efforts in drafting the new REIT guidelines;
• there was strong investment potential for MREITs as the country offered some of the highest yields in the region;
• Investment in REITs should be encouraged and hope that one day REITs will join mutual funds as an approved alternate investment for Employees Provident Fund holders;
• initiatives to reduce the withholding tax structure for MREITs was “a step in the right direction” but the new regulations could have been better streamlined and made less complicated. There were still areas in which industry players needed clarification from the authorities;

• the withholding tax of 15% on local investors would adversely affect pensioners and low-income earners who aimed at getting the best returns from their savings.

© UOA Asset Management Sdn Bhd executive director David Khor:

• more aggressive incentives would encourage the industry to take off as the local REIT market was substantially smaller than those in other regional markets;
• although Malaysian real estate value is cheaper in dollar terms, it offer a wider range of assets in the form of Islamic REITs, plantations, real estate, hospitals, and others, if more aggressive steps to encourage foreign participation are in place;
• The growth and expansion of MREITs need foreign participation, not just that of local investors. Local REITs may need to look overseas to expand and this will require enlarging their units and fund sizes.

Seems that the various Reit experts have voiced similar opinions that :

· Malaysian Reit’s future prospects is very bright;

· It is still relatively small and it needs for more support from the government in giving more incentives to the Reit industry to let it flourish like what’s happening in other countries.

Looking at the above scenario, we might say that we are still below mark in the evolution of making Reit as one of the capitalmarket products despite the encouraging comments from our Prime Minister and Finance Minister Datuk Seri Abdullah Ahmad Badawi in his Budget 2007 speech which quoted :

“we need to diversify the capital market products to attract local and foreign investors, given the large investible funds available overseas, especially from West Asia, which is estimated at US$1 trillion (RM3.68 trillion),”

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