Rental Income Tax Exemption Overview

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Questions and Answers

What is the minimum distribution requirement for S-REITs as of April 2020?

80%

50%

90% (correct)

70%

Which framework was established to regulate S-REITs in Singapore?

Collective Investment Scheme Regulations

Capital Market Services License

Code on Securities and Futures

Property Fund Guidelines (correct)

What distinguishes the external manager model in Asian REIT markets?

Managers are part of the REIT

It allows greater regulatory oversight

Managers are separate entities from the REIT (correct)

Internal managers handle all financial decisions

As of now, what is the gearing limit for S-REITs in Singapore?

50% Signup and view all the answers

Which of the following statements about internally managed REITs is true?

They have lower management fees compared to external ones. Signup and view all the answers

What percentage of the Singapore Exchange's market cap is made up by S-REITs as of December 2021?

13% Signup and view all the answers

Which regulatory framework governs Singapore REITs?

Collective Investment Scheme and Property Fund Guidelines Signup and view all the answers

What is the minimum distribution percentage that S-REITs are required to maintain?

90% Signup and view all the answers

As of December 2021, what portion of S-REITs hold foreign properties?

More than 85% Signup and view all the answers

Which of the following statements about the gearing limit for S-REITs is correct?

The gearing limit was reduced to 50% in 2020. Signup and view all the answers

What has been the average dividend yield of S-REITs as of May 2022?

5.6% Signup and view all the answers

Which fund was the first S-REIT established in Singapore?

CapitaMall Trust (CMT) Signup and view all the answers

How does the external manager model in Asian REIT markets differ from the internal manager model in the US?

External managers are less profitable than internal managers. Signup and view all the answers

What was introduced as a new form of business structure in Singapore in September 2004?

Business Trusts (BTs) Signup and view all the answers

Which of the following is TRUE regarding Business Trusts (BTs)?

The trustee-manager has legal ownership of the underlying assets. Signup and view all the answers

Which type of income is eligible for tax exemption under S-REIT?

Foreign dividends Signup and view all the answers

What is a key difference between Business Trusts and companies regarding financial distributions?

BTs can pay distributions from operating cashflow. Signup and view all the answers

What is a primary motivation for establishing Business Trusts in Singapore?

To add greater depth and breadth to equity markets Signup and view all the answers

Who is responsible for managing the assets in a Business Trust?

The trustee-manager Signup and view all the answers

Which of the following statements about the Business Trusts Act is correct?

It established duties and accountability for trustee-managers. Signup and view all the answers

Which income type is NOT mentioned as tax exempt for unitholders?

Capital gains from trust asset sales Signup and view all the answers

What is the maximum aggregate leverage limit for SREITs?

45% Signup and view all the answers

What is the required Interest Coverage Ratio (ICR) for SREITs?

What does the gross revenue of a REIT primarily consist of?

Rental income Signup and view all the answers

Which of the following is NOT a component deducted from gross revenue to arrive at distributable income?

Property taxes Signup and view all the answers

What is the significance of analyzing the proposed July 2024 change in gearing and ICR?

It may require REITs to adjust their financial strategies. Signup and view all the answers

Which type of REIT focuses on direct investment in properties?

Equity REITs Signup and view all the answers

How is Net Property Income calculated?

Gross Revenue - Property Operating Expenses Signup and view all the answers

What do property funds guidelines (PFG) regulate?

Investment strategies of REITs Signup and view all the answers

What effect does borrowing at a higher percentage have on a REIT's returns?

Increases baseline returns Signup and view all the answers

What type of entities are REITs considered to be?

Tax transparent pass-through vehicles Signup and view all the answers

What does a P/NAV ratio of less than one indicate about a REIT?

The REIT is undervalued. Signup and view all the answers

Why might an investor be concerned if a REIT's share price looks good but has low volume?

It may suggest low demand and liquidity issues. Signup and view all the answers

What is one significant factor that impacts the valuation of a REIT?

The interest rates and debt market conditions. Signup and view all the answers

What trend was observed in the valuation of Manulife US REIT since the second half of 2021?

Negative percentage change in valuation. Signup and view all the answers

What does DPU stand for, and why is it significant for REITs?

Distribution Per Unit; it indicates yield performance. Signup and view all the answers

What is a common requirement for evaluating a REIT's portfolio?

Valuations must be carried out at least once a year. Signup and view all the answers

How can higher capitalisation rates affect property valuations?

They create downward pressure on valuations. Signup and view all the answers

When evaluating the performance of a REIT, what should be considered alongside past DPU values?

Unit price performance. Signup and view all the answers

What is an important consideration for investors when determining the rental income certainty from a REIT?

The length of the lease agreements. Signup and view all the answers

What does a downward trend in a REIT's net asset value suggest?

Losing market confidence. Signup and view all the answers

Study Notes

Rental Income and Structures

Rental income can be part of an intermediate structure under estates.
Tax-exempt income includes foreign dividends, foreign interests, and foreign trust distributions.

Business Trusts (BTs)

Introduced in Singapore in September 2004 under the Business Trusts Act.
BTs function like companies but are structured as trusts, lacking separate legal entity status.
Trustee-managers hold legal ownership and manage assets for beneficiaries.
Legal protections for unitholders and trustee-manager accountability established by the Act.
BTs can pay distributions from operating cash flow, unlike companies which pay dividends from profits.

Regulatory Framework for S-REITs

Established in July 2002 with Property Fund Guidelines.
Administered by the Monetary Authority of Singapore (MAS) and Singapore Exchange (SGX).
CapitaMall Trust (CMT) was the first S-REIT, set up in 2002.
S-REITs must invest at least 70% in real estate-related assets; property development capped at 10%.
Gearing limit is 50% as of April 2020, with a minimum distribution requirement of 90%.

Manager Structures in REITs

Asian REITs generally operate under an external manager model; the US has shifted towards internal managers.
Internally managed REITs tend to outperform externally managed counterparts.
Singapore's market includes both models, with moves towards internalization by trusts like Sabana REIT.

Performance and Metrics of S-REITs

S-REITs rank as the 6th largest globally, with 44 S-REITs and property trusts listed on SGX and a market cap of SGD110 billion as of December 2021.
Average dividend yield reported at 5.6% in May 2022.
Over 85% of S-REITs own foreign properties; 19 S-REITs hold entirely foreign property portfolios.

Key Financial Metrics for REITs

Aggregate leverage limit for S-REITs set at 45%, with a suggested Interest Coverage Ratio (ICR) of at least 2.5 times.
Importance of monitoring gearing ratios, acquisition fees, divestment fees, and development fees.

REIT Pricing and Valuation

Price/NAV (Net Asset Value) under 1 indicates undervaluation, while over 1 suggests premium valuation.
Valuations must be conducted at least annually, with net asset value calculated as total assets minus total liabilities.
Recent trends in US office capitalisation rates negatively impacted property valuations.

Portfolio and Asset Management

Changes in portfolio composition, including acquisitions and divestitures, affect valuation and performance.
Investors require data on pricing trends, DPU (Distribution Per Unit), and asset values for informed decision-making.
The relationship between gross revenue, property operating expenses, and management fees is crucial for understanding distributable income.

Conclusion

Understanding the structures and regulations of S-REITs and BTs is essential for navigating Singapore's investment landscape.
Continuous monitoring of market trends and financial metrics can inform strategic investment decisions in the REIT sector.

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Description

This quiz explores the structure of rental income and its tax implications. Focused on tax exemption eligibility for foreign income and specific rental income, it provides a summary of how these financial elements interact. Ideal for those studying real estate finance or taxation.