The withholding tax imposed on dividends is holding back the growth of real estate investment trusts (Reits) despite their high defensive qualities, especially in the current bearish market.
Analysts said Reits were currently below the radar screen of investors, especially retail investors, due to the withholding tax on dividends. The withholding tax is 15% for individuals and 20% to 26% for institutions. In Singapore, it is 10% for institutions.
Unlike Reits, companies which reward shareholders with dividends would have already paid the income tax while the investor can also offset the amount as a tax credit. However, this is not the case for Reits.
The analysts said other concerns were that lending rates could move up while it would also be difficult to push up rental rates in an economy which was slowing down.
However, there was more liquidity for Reits as investors could either buy or sell their Reit units much easier when compared with property, they said. But the lacklustre market conditions also meant slow appreciation of the Reit units.
Am ARA REIT Managers Sdn Bhd director Michael Lim said the upside for Reits was their high defensive qualities.
Michael Lim
“Reits offer good dividend yields, good asset backing and tenant agreements are locked in for three years,” he said.
It is understood that the Government is looking at the issue of withholding tax but it remains to be seen if it will be reduced in the Budget 2009 proposals.
Lim said Reits such as AmFIRST REIT were defensive instruments which provided good and stable returns/yield. Based on the latest quarterly results of AmFIRST REIT, its annualised return/yield is an impressive 10% (based on the closing market price of 88 sen for AmFIRST REIT on Wednesday).
By The Star
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