Source : Business Times - 16 Mar 2009
THE authorities recently rejected the request of some real estate investment trust (Reit) managers to reduce the minimum payout ratio to unitholders while still being allowed to enjoy tax concessions.
Spelling out the government’s stand a few weeks ago, Senior Minister of State for Finance and Transport Lim Hwee Hua said: ‘The key characteristics of Reits as a stable, high-payout, pass-through vehicle are important considerations for investors and, hence, must be preserved.’
‘Ministry of Finance and Monetary Authority of Singapore have deliberated this issue and have decided that the minimum payout ratio would not be changed,’ she added.
Under current guidelines, Reits have to distribute to unitholders at least 90 per cent of their distributable income, in order to enjoy tax transparency, which means exemption from paying corporate tax at the Reit/vehicle, on the portion of income they distribute.
Reit managers have urged the government for a rule change as they deemed it conservative to retain cash in view of the very difficult credit market conditions. The worry is that they may not be able to get refinancing, and even if they could the costs may be exorbitant.
‘While we appreciate the refinancing difficulties faced by Reits, there are, at present, no strong grounds to justify a special tax treatment for Reits that is not made available to other entities,’ said Mrs Lim.
She noted that a few Singapore Reits have already managed to secure refinancing either through bank loans, loans from sponsors or recapitalisation, albeit at a higher cost. ‘It is unrealistic for S-Reits to expect to have continued access to cheap and easy credit during this recession,’ Mrs Lim commented.
While the authorities have made their stand clear on the minimum ‘payout’, the fact is there is another way within the confines of existing rules for Reits to conserve cash and yet still be entitled to the tax concessions: distribute scrip dividend instead of cash dividend.
By distributing scrip-only dividend, that is investors get additional units in the Reits instead of cash, these trusts are able to retain cash without altering their payout policies. Hence they are not in breach of their 90 per cent payout rule in order to be entitled to the tax concessions. Indeed, one Reit has already proposed doing that, and it is said that others are considering it as well.
Saizen Reit announced earlier this year that its board has proposed the adoption of a scrip-only dividend scheme. ‘Such scheme, if adopted, provides flexibility for Saizen Reit to pay out dividends in the form of units in future,’ it said. But it added that the payment of dividends in the form of units will be a temporary measure to conserve cash during this uncertain period. ‘Saizen Reit will resume its dividend payment in the form of cash once the loan refinancing issues are resolved,’ it assured unitholders.
Of course, distribution of scrip-only dividend is tantamount to a Reit not distributing its income at all. Hence, if adopted by many, it would mean that Reits’ key characteristics of being ‘a stable, high-payout, pass-through vehicle’ may no longer be met.
From the standpoint of unitholders, yes, they can sell the additional units received in the market to raise cash. But they will have to incur transaction costs. Furthermore, there is no telling what the market price will be in today’s environment. On the flip side, unitholders also don’t want to see the Reits collapse because of their inability to refinance their loans. That would not be in their interest at all.
In any case, the proposal of the scrip-dividend payout is still subject to approval by the Singapore Exchange (SGX). Given its inconsistency with the Ministry of Finance’s stand on preserving the key characteristics of Reits, it would be surprising if indeed SGX gives the go-ahead for the proposal to be implemented.
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