MREITs unfazed by tax revision

IT was already written on the wall. Malaysia’s taxman has been casting his net wider, and the concessionary 10% withholding tax on Malaysian real estate investment trusts (MREITs) was always set to expire in 2025.

When the waiver was removed last week, MREITs took a beating, though most have since clawed back some losses.

The sell-off has also pushed yields higher, making quality MREITs more attractive to yield-seeking domestic institutional investors and retirees.

For Malaysian institutional investors – particularly government-linked investment companies (GLICs), which manage billions and are largely mandated to invest domestically – returns from MREITS will now be taxed under the standard corporate income tax regime.

Kenanga Research points out certain Malaysian provident and retirement funds may continue to be tax-exempt on income generated including dividends. As such, the change has limited impact on them.

The bigger upside may lie with retirees. For years, there has been concern over the lack of income-generating instruments for this group. Regulators, including the Securities Commission, have sought to broaden access to higher-yielding assets, such as by encouraging the retailisation of corporate bonds.

With the removal of the preferential tax treatment, all MREIT income must now be declared.

However, as many Malaysian retirees fall below the taxable threshold due to low income and personal reliefs, their effective yields remain intact – and potentially more attractive.

With MREITs having been sold down, this creates a prime opportunity for them to pick up quality names. Following the sell-down, many well-run MREITs are trading at attractive levels – though caution is needed to avoid duds and dividend traps.

Arguably, MREITs are a safer bet than some of the new yield products being rolled out for Malaysian retail investors, including bonds, sukuk, or private market instruments like private equity and private credit, which are being “democratised” into retail bite sizes.

These alternatives carry risks that are harder to assess. MREITs now offer decent yields on a silver platter for the silver-haired.

So, who sold MREITs after the preferential tax treatment was withdrawn? Mostly foreign investors.

Previously, non-resident distributions benefitted from the concessionary withholding tax. With its removal, they now face a standard 24% withholding tax, reducing their net returns.

Singapore REITs (SREITs), in contrast, still enjoy favourable tax treatment, and some foreign funds likely shifted from MREITs to SREITs. It is well established that Singapore’s market is home to some of the world’s top REITs and attracts global investors.

That said, it is interesting to note that SREITs have also seen a recent sell-off, largely due to multiple concerns including fear over potential interest rate hikes from inflationary pressures – a factor that also affects MREITs.

When interest rates rise, REITs generally become less attractive.

Many SREITs hold global assets, which once set them apart from MREITs, but rising geopolitical risks now make this a potential downside.

For investors seeking simpler exposure, Bursa Malaysia’s MREITs remain a straightforward option.

The strengthening of the ringgit has also eroded SREITs’ appeal for Malaysians who once sought a currency hedge.

For high-tax Malaysian investors with significant MREIT exposure, there’s another way to mitigate tax on distributions following the removal of the preferential treatment: setting up a single family office in the Forest City Special Financial Zone in Johor.