For an equity market that harbours ambitions of becoming a regional leader, Singapore hasn't exactly had much to crow about, with volumes falling in the primary market over recent years. Secondary market trading isn’t faring any better, having fallen behind Thailand in January.
Despite all its issues, Singapore does have an edge in some areas. And none is more apparent than its Reit framework, arguably the most complete in the region.
But when the government announced in this week’s budget that a 3% stamp duty remission on the transfer of local properties to Reits would not be extended, some market participants were worried that Singapore could lose one of the main pillars of its equity market.
It’s not hard to see why they are fretting: an accommodative tax regime was what set Singapore apart from competitors such as Hong Kong. But what they are failing to see is why Singapore has decided to let the concession lapse.
Overseas assets
As the budget mentioned, the purpose of the stamp duty remission in the first place was to enable the Reit industry to create a critical mass of local assets and then use that as a base from which to expand abroad.
Looking at how Reits have dominated IPO volumes over the past couple of years, the first part of the target has already been achieved, so it is only right that the country would do more to move on to the second stage.
Removing the stamp duty remission enables the authorities to achieve just that. With local assets now set to become more expensive, Reits should now turn their attention to acquiring overseas properties instead.
This is important, since it shows that Singapore is well aware of its limitations, including its small size, which restricts the amount of domestic assets issuers can pick from.
But even though Singapore is keen for S-Reits to become more regional, it has not completely closed the door to domestic acquisitions. While a 3% stamp duty might seem prohibitive, the negative impact is less serious as it looks since there are ways for issuers to mitigate the tax.
That, plus the fact that this is the only concession Singapore has chosen to remove, showed that the authorities are aware of the S-Reit market’s advantages and have wisely chosen the least obtrusive way of reaching their goal of having a more international market.
For Singapore, getting Reits to expand their portfolios overseas is very important for the development of the equity market, especially when its efforts to get more corporates to list on the SGX have so far proved futile.
Unlike Hong Kong, which has a ready source of Chinese issuers to help boost its equity market, Singapore can only rely on a small domestic corporate market, coupled with the odd listing from the rest of southeast Asia.
Reits are the only asset Singapore can rely on. While letting the stamp duty remission lapse will create some short term issues, the change should help construct a sustainable long term future for the country’s capital markets, one that lies outside Singapore’s borders.