As a significant global financial centre, Singapore is home to the fastest-growing wealth hub in Asia. Investors from this part of the world are increasingly using Singapore as a platform for investment opportunities across the globe including into the UK and European economies. In fact, more than 75% of Singapore’s assets under management derive from international economies1.
The Singapore real estate investment trust (REIT) market has experienced rapid growth and has established itself as the largest Asian REIT market outside Japan, with 44 REITs and property trusts with total market capitalisation of circa USD 66 billion and dividend yield of circa 6.6%. The Singapore REIT market is highly liquid and was the global leader for REIT IPOs in 2019, accounting for 44% of funds raised.
Growth in the Singapore REIT market has come from overseas assets: all but one of the 14 REITs that have listed in the past four years hold overseas assets, and 10 REITs have significant exposure to Europe. In fact, earlier this year, we saw the launch of the first REIT focused solely on UK real estate, the units for which were heavily oversubscribed reflecting strong investor demand.
UK and German real estate currently dominate investment into Europe. Investors are progressively getting familiar with real estate from other European countries, however, with the Netherlands, Italy and France attracting growing investment.
“With the huge uncertainties thrown up by Covid-19 and likely changes to the way we will live and work, it is really important that the UK continues to attract investment from around the world. For that, there need to be the right platforms and investment structures in place.”
Ion Fletcher, Director of Finance Policy, British Property Federation
As real estate investment strategies adapt in response to COVID-19, demand remains strong for secure income from real estate sectors which are proving to be resilient, including pan-European logistics, healthcare and private-rented residential.
Against this backdrop, we are seeing growing interest from UK private funds with UK and European real estate assets considering potential exit and growth strategies via a listing on the Singapore REIT market. Singapore is attractive as a gateway to capital from Asia with access to a wide pool of global and Asian institutional investors, private wealth investors and family offices.
There are many reasons why a sponsor might set up a REIT platform in Singapore. Typically, the structure allows the sponsor to monetise their mature assets and redeploy capital to new opportunities. The platform is designed to be scalable, with the ability to raise funds and grow independently, to support future growth opportunities and exit strategies for the sponsor’s pipeline.
Advanced planning is critical for a successful IPO. A tax-efficient holding structure that manages tax leakage on distributions to investors will be important to give certainty for investors and to confirm that the distribution yield is attractive compared to peers.
While Singapore benefits from many favourable international double taxation agreements, the increasingly complex international tax landscape means it is vitally important that tax planning is considered early in the process. In particular the Organisation for Economic Co-operation and Development’s Base Erosion and Profit Shifting (BEPS) initiative continues to drive fundamental tax changes, including tax treaty changes and restrictions on the deductibility of interest.
In the UK, non-resident landlords holding UK real estate are generally now subject to UK tax on gains on both direct and indirect disposals of UK real estate since April 2019. They have also come within the scope of the corporate interest restriction rules for the first time from April 2020, as the non-resident landlord income tax regime has been replaced by the corporation tax regime.
These recent tax developments have eroded many of the benefits of traditional offshore holding structures and have prompted many of our clients to review their structures. Alternative structures, including onshore, are becoming more attractive.
In particular, the UK REIT structure has become increasingly appealing with the growing demand for onshore structures. Not only is it well established and approved by HMRC, it is a globally recognised brand and there are now more than 90 UK REITs.
With the growing appetite of Singapore REITs acquiring UK real estate and the increasing appetite for using onshore holding structures, our clients are reviewing their structures to ensure they are fit for purpose and support their strategic objectives.
An alternative structure being considered is a UK REIT for UK real estate, subject to meeting qualifying conditions. The key benefit is that the UK REIT structure is exempt from UK corporation tax (currently at 19%) on qualifying property rental business income and gains. Instead, UK with-holding tax should be applied only in respect of the distribution of property income and gains by the UK REIT, at a reduced rate of 15% to the extent that the UK-Singapore double-tax treaty can be accessed.
Another benefit of the UK REIT that is often overlooked is the competitive advantage it can have compared to a non-UK REIT competitor when bidding for UK real estate held in a corporate wrapper. A UK REIT acquiring a corporate structure can benefit from a tax-free uplift of the base cost of the UK properties to their market value. This effectively eliminates any deferred tax liabilities that might otherwise be recognised on the balance sheet of the target and giving an instant uplift in net asset value of the target.
Demand for UK and European real estate from the Singapore REIT platform remains incredibly strong. There is an opportunity for private funds to consider their strategic objectives and structures in view of a potential Singapore REIT listing, and this includes existing Singapore private trusts with UK real estate assets planning for a future listing on the Singapore REIT market.
There is also an opportunity for existing Singapore REITs to review their structures for investing into the UK and Europe to ensure they support your objectives and in view of recent tax changes. We have recent practical experience of advising on this.
To discuss any of the matters raised in this article, contact Matthew Stannard.