SINGAPORE (Mar 6): UOB Kay Hian is staying "overweight" on REITs given improved tax transparency treatment of REIT exchange traded funds (ETFs) is expected to boost yield and proliferation of the instrument.

This means key constituents of FSTREI (FTSE ST Real Estate Investment Trusts Index) and ETFs should also benefit as greater fund flow should support valuations.

"CDL Hospitality Trusts (CDL-HT), CapitaLand Commercial Trust (CCT) and Ascendas REIT (A-REIT) remain our top picks," says analyst Vikrant Pandey in a Tuesday report.

As announced in Singapore Budget 2018, tax transparency treatment for S-REITs will soon be extended to ETF invested in REITs.

With the tax transparency treatment, distributions from S-REITs to ETFs will no longer be subjected to a 17% withholding tax for individuals for both locals and foreigners.

For foreign companies, the government has introduced a 10% concessionary tax rate on REIT ETFs’ distributions on a par with the tax rate they pay on REITs’ distributions.

The tax concessions for REIT ETFs will take effect on or after Jul 1, with a review date of Mar 31. More details of the change will be released by the MAS and IRAS by Mar 18.

As this addresses tax leakage, there no more difference between investing in REIT ETFs and directly in REITs, says Vikrant.

In addition, the extension of tax transparency to REIT ETFs will significantly enhance ETFs’ yields which yield an average of 4% p.a. after management fees vs 6% by SREITs.

The move to introduce a 10% concessionary tax on REIT ETFs -- which is on par with tax rates on S-REITs’ distributions -- for foreign corporate investors will also increase its appeal to foreign investors and widen the investor base.

Within the FSTREI index, key constituents include A-REIT (11.8% weighting), Suntec REIT (9.5%), CapitaLand Mall Trust (8.8%), CCT (7.8%) and Mapletree Commercial Trust (5.7%).

Vikrant says the same key picks are also represented among the top holdings of existing REIT ETFs combined, including Nikko AM-Straits Trading ex-Japan REIT ETF, Lion-Phillip SREIT and Phillip SGX APAC Dividend Leaders REIT ETF.

"We foresee that with more REIT ETFs coming through, they will be replicated based on existing S-REIT indices, like the FSTREI," adds Vikrant.

UOB has target prices of $1.95, $2.09 and $3.05 for CDL-HT, CCT and A-REIT respectively.

As at 3.50pm, units in CDL-HT are trading 1 cent higher at $1.66 or 15.8 times forward earnings; units of CCT are trading 3 cents higher at $1.73 or 17.8 times forward earnings while units of A-REIT are trading 3 cents higher at $2.61 or 18 times forward earnings.