Introduction of REITs holds plenty of promise for Indonesia
    Category: Column By : Todd Lauchlan Read : 1416 Date : Friday, February 19, 2016 - 08:05:30

    This year will be a pivotal one for real estate given reforms planned by President Joko “Jokowi” Widodo with the introduction of real-estate investment trusts (REITs) in Indonesia. Indonesia announced last October that it would encourage the creation of REITs through measures such as scrapping double taxation of property assets held in REITs. As a result, major developers such as Ciputra and Sinarmas Land have expressed interest in REITs.

    REITs would encourage developers to create institutional-grade assets, which would be attractive to international investors. Despite the country’s encouraging demographics, the lack of such assets has made it hard for international investors to put money to work here.

    Ironing out the details will likely take most of this year. But Indonesia can emulate Singapore, which has Southeast Asia’s deepest and most liquid REIT market. Last year, the administration removed a major obstacle to REIT investment. Previously, the government collected tax on both a property development company and its affiliated special purpose company to oversee a REIT. Now the developer and the special purpose vehicle will be taxed once, effectively removing a 15% tax.

    This move means developers can rethink their strategy. For instance, Indonesian developer Lippo Group already has two REITs listed in Singapore—and now may move those listings to Jakarta. “Because of the government policy, we think Indonesia has very good potential for REITs,” Lippo Group Chief Executive James Riady said at the end of October.

    REITs in Singapore and the U.S. must distribute at least 90% of their income to investors, making them ideal for “widows and orphans” by spinning off regular and predictable cash streams. Those stipulations are not yet decided in Indonesia. Even in Singapore, the early going was mixed when REITS were introduced. The first attempted listing, SingMall Property Trust, was pulled after bookmakers sold only 80% of the shares. But then its developer CapitaLand repackaged the REIT as the Mall Trust, and it saw a warm reception when listed in 2002.

    REITS have benefits for developers. For one, they can use REITs to dispose of completed projects. Transactions must be handled at arm’s length—if not, the market will reflect any mispricing in the REIT’s price. Still, regulators and corporate boards must look to protect shareholders.

    Developers can also receive substantial management fees for services to a REIT. For instance, CapitaCommercial Trust paid its sponsor S$20 million (US$14 million) in 2009 and S$14 million in 2008, according to PwC. The accounting firm notes that such fee-based income is more stable than property values, leading to a higher valuation.

    PwC says that developers should demonstrate their commitment to affiliated REITs by extending their brand name to the trust and by taking a substantial long-term stake in the listed vehicle, with a lock-up period to maintain the holding.

    In Singapore, REITs must have at least three independent directors on their audit committee, helping minimize conflicts of interest. One hopes to see similar clauses in place for Indonesian REITs. To date, there has been limited direct investment into Indonesian real estate by overseas investors. But Indonesian developers and landlords have attracted substantial amounts of capital. REITs should appeal to both institutional and retail investors, helping to significantly deepen and broaden the real-estate industry.