Yesterday, there was reports from Lippo Group CEO James Raidy that the group is taking its first steps to move their two REITs listed in Singapore, First REIT and Lippo Malls Retail Trust back to Indonesia. (Check out the two REIT dividend profile and debt profile here)
What is the double taxation about
This is to take advantage of the recent removable of double taxation law by the Indonesian Government. Previously the practice is that the government collects income tax from the property development company AND the special purpose company (SPV) who will issue the REITs with the underlying real estate business.
This taxation removal will see the the property development company and SPV be tax once, which means a removal of a current 15% SPV tax.
So you can see the appeal to take advantage.
This is inline with the government’s plan to allow the same financial engineering that took place in Singapore over there in Indonesia.
Like Singapore, when growth is stalling, the government sees this financial engineering as a way to create growth.
The growth trumps the loss in tax dollars.
Wait for the picture to clear up
First REIT have published an announcement this morning:
I suppose if the parent wants to shift, the manager do not have much of a choice. It is a loss for investors here. More for First REIT and the jury is still out on Lippo Malls.
The appeal of First REIT is the extremely long triple net lease rental of 15 years and that the rental is pegged to an initial Rupiah and SGD exchange rate.
For the past 10 years of listing, the Rupiah have been on a one way downhill move. So you can see the benefit of this peg.
The shareholders of First REIT (me included) have enjoyed a high IRR of 16% if I remember since IPO or for the past 10 years.
However, things could change. I honestly wonder whether it is wise to delist and list there with a developing market for REIT versus one that is matured. I suppose the benefit for Lippo is that its easier to sell them a story that the investors here might easily see right through.
The benefit here is that more assets from the developer can be liquidated into the REIT entity.
The middle ground could be that they list in two locations.
Your planned actions
What should be on your mind is whether there are negative risk (news event that could cause the fundamentals to change for the worse) or positive risk (news event that could cause the fundamentals to change for the better) and your planned actions.
In my opinion, if there are no negative risk, the planned thoughts is what are the prospects to shift to that offer similar returns per unit risk.
The evaluation should not be on whether you are positive or negative on your cost of purchase. That is sunked.
It should be, if there is an announcement, after you move to cash, are there any prospects that is providing this reward or better at the same level of riskiness. Note that the reward here is the prevailing dividend yield + future capital growth and not your yield on cost.