by: Sasmaya Tuhuleley
Property development in Indonesia still heavily depends on bank loans, because of the country’s less-developed capital market in terms of product variety. As a capital market instrument for infrastructure and property finance, Real Estate Investment Trusts (REITs) have been successesfully introduced in several Asian countries like Japan, Hong Kong, Malaysia and Singapore. Considering economic growth, urbanization, increasing affluences, and the growth of middle classes that need mounting funds to finance infrastructure and property development, REITs are expected to be successfully introduced in Indonesia as well.
The introducing of REITs in Indonesia can be seen as an effort of the country to find new alternative source of funds to finance its economic activities, especially for property development. Indonesia can not only depend on bank loans to finance its property development, because it is not healthful for the country. As we know, property development needs long-term financing, while banks can only provide short-term loans because banks’ source of funds is mostly composed of deposits. Besides, property development needs mounting of funds that banks can hardly provide.
What are REITs? A REIT is a real estate company that offers common shares to investors (public). A REIT share represents ownership in an operating business with two characteristics, including managing groups of income-producing properties and distributing most of its profits to investors as dividends. There are two types of REITs, which are mortgage REITs and equity REITs. Mortgage REITs are REITs that make loans secured by real estate, while equity REITs are REITs that focus on the “hard assets” business operations and tend to specialize in owning certain properties like apartments, office buildings, or commercial real estates. Equity REITs are generally the type of REITs that are referred to when discussing them as an investment tool.
REITs are an attractive high-yield capital market instrument for investors. A REIT is also a way for ordinary or everyday investors to invest in property. Investors can buy, sell and trade shares of REITs just as they would for a normal stock. Like a stock, investors in REITs look for trustworthy and competent management and reasonable compensation of those managers.
As for real estate companies or developers, REITs are the most prefered instrument to finance property compared to bank loans or other capital market instruments. In the property finance using REITs instrument, developers are not the ones who finance the project but inventors do. Because the project is basically financed by investors, developers will not be exposed to any financial risk. Therefore, developers can focus on developing or/and managing the properties without worry about financial aspects.
Real estate companies or developers in Indonesia have been long awaiting instrument that can provide long-term funds to finance their property projects. Therefore now is the momentum to introduce REITs in Indonesia. The Indonesia Capital Market Supervisory Agency or “BAPEPAM-LK” has issued four decrees or regulations on REITs in December 2007.
About 10 years ago, in 1997 “BAPEPAM-LK” also issued several regulations governing publicly-listed asset-backed securities (ABS) transactions through a collective investment contract (CIC) which is a contract made between investment manager and a custodian bank. This is to shield the ABS-CIC or known as “KIK-EBA” from the originator’s bankruptcy with regards to the transfer of assets from originator to the “KIK-EBA”. The “KIK-EBA” is not a special purpose vehicle (SPV) which is in most jurisdictions known as a trust. But “KIK-EBA” may be utilized as a trust, because of its remote bankruptcy attribute. The issuance of “KIK-EBA” guidelines is aimed at encourage onshore securitization.
Nonetheless, the effectiveness of the “KIK-EBA” model remains to be tested in the marketplace. A number of key concern regarding Indonesia’s structured finance market, including its legal framework, tax environment, accounting treatment, and other potential challenges are still unclear. According to Fitch Published Report, should any of the potential onshore deals overcome all hurdles and be completed successfully, it may pave the way for a burgeoning Indonesia’s securitization market. However, until now there is no single instrument of “KIK-EBA” has been traded in the market yet.
REITs that will operate using the “KIK-EBA” legal framework will face exactly the same situation. REITs need potential onshore deals to overcome all hurdles if any. The question is who will be the pioneer to start the deal?
REITs are not something new for Indonesians’s real estate companies. In 2006, PT. Lippo Karawachi, Tbk, a sister company of Lippo Group issued for the first time First Real Etsate Investment Trust (First REIT) in Singapore. The First REIT own three hospitals, including Siloam Hospitals Lippo Karawaci, Siloam Hospitals West Jakarta, Siloam Hospitals Surabaya and one hotel, which is Imperial Aryaduta Hotel & Country Club. All the above assets are located in Indonesia. After being listed in Singapore Exchange, First REIT then acquired other three properties located in Singapore. The assets value of First REIT as of September 2007 at Sin $ 325.6 million, showing an increase of Sin $ 17.6 million over its book value.
In 2007, Lippo Group also listed its second REITs in Singapore. Lippo plans to list three more REITs in Singapore Exchange in the next two to three years. The assets will include several retail malls in Indonesia and China. The total new portfolio size of Lippo’s three new REITs will be about Sin $ 4 billion.
Lippo Group is not the only Indonesia’s real estate company that is interested in listing REITs in Singapore. Salim Group and Sinar Mas Group have also had early talks to list REITs in the city-state since 2006. Perdana Gapuraprima Group another prominent real estate company in Indonesia is also looking to list REITs on the Singapore Exchange this year. The REITs will be a joint venture with Amanah Raya Berhad, a company owned by the government of Malaysia. The REITs will have the assets of five malls from Perdana Gapuraprima located in Indonesia and other two malls from Amanah Raya located in Malaysia.
While Singapore has been successful in attracting Indonesia’s real estate companies to list REITs in Singapore Exchange, Indonesia could also do the same. The Indonesia Stock Exchange can look for any potential onshore deal from Indonesia’s real estate companies and ask the authorities to overcome all hurdles.
Catatan: kolom ini pernah dimuat di majalah Asian Property Investment
Property development in Indonesia still heavily depends on bank loans, because of the country’s less-developed capital market in terms of product variety. As a capital market instrument for infrastructure and property finance, Real Estate Investment Trusts (REITs) have been successesfully introduced in several Asian countries like Japan, Hong Kong, Malaysia and Singapore. Considering economic growth, urbanization, increasing affluences, and the growth of middle classes that need mounting funds to finance infrastructure and property development, REITs are expected to be successfully introduced in Indonesia as well.
The introducing of REITs in Indonesia can be seen as an effort of the country to find new alternative source of funds to finance its economic activities, especially for property development. Indonesia can not only depend on bank loans to finance its property development, because it is not healthful for the country. As we know, property development needs long-term financing, while banks can only provide short-term loans because banks’ source of funds is mostly composed of deposits. Besides, property development needs mounting of funds that banks can hardly provide.
What are REITs? A REIT is a real estate company that offers common shares to investors (public). A REIT share represents ownership in an operating business with two characteristics, including managing groups of income-producing properties and distributing most of its profits to investors as dividends. There are two types of REITs, which are mortgage REITs and equity REITs. Mortgage REITs are REITs that make loans secured by real estate, while equity REITs are REITs that focus on the “hard assets” business operations and tend to specialize in owning certain properties like apartments, office buildings, or commercial real estates. Equity REITs are generally the type of REITs that are referred to when discussing them as an investment tool.
REITs are an attractive high-yield capital market instrument for investors. A REIT is also a way for ordinary or everyday investors to invest in property. Investors can buy, sell and trade shares of REITs just as they would for a normal stock. Like a stock, investors in REITs look for trustworthy and competent management and reasonable compensation of those managers.
As for real estate companies or developers, REITs are the most prefered instrument to finance property compared to bank loans or other capital market instruments. In the property finance using REITs instrument, developers are not the ones who finance the project but inventors do. Because the project is basically financed by investors, developers will not be exposed to any financial risk. Therefore, developers can focus on developing or/and managing the properties without worry about financial aspects.
Real estate companies or developers in Indonesia have been long awaiting instrument that can provide long-term funds to finance their property projects. Therefore now is the momentum to introduce REITs in Indonesia. The Indonesia Capital Market Supervisory Agency or “BAPEPAM-LK” has issued four decrees or regulations on REITs in December 2007.
About 10 years ago, in 1997 “BAPEPAM-LK” also issued several regulations governing publicly-listed asset-backed securities (ABS) transactions through a collective investment contract (CIC) which is a contract made between investment manager and a custodian bank. This is to shield the ABS-CIC or known as “KIK-EBA” from the originator’s bankruptcy with regards to the transfer of assets from originator to the “KIK-EBA”. The “KIK-EBA” is not a special purpose vehicle (SPV) which is in most jurisdictions known as a trust. But “KIK-EBA” may be utilized as a trust, because of its remote bankruptcy attribute. The issuance of “KIK-EBA” guidelines is aimed at encourage onshore securitization.
Nonetheless, the effectiveness of the “KIK-EBA” model remains to be tested in the marketplace. A number of key concern regarding Indonesia’s structured finance market, including its legal framework, tax environment, accounting treatment, and other potential challenges are still unclear. According to Fitch Published Report, should any of the potential onshore deals overcome all hurdles and be completed successfully, it may pave the way for a burgeoning Indonesia’s securitization market. However, until now there is no single instrument of “KIK-EBA” has been traded in the market yet.
REITs that will operate using the “KIK-EBA” legal framework will face exactly the same situation. REITs need potential onshore deals to overcome all hurdles if any. The question is who will be the pioneer to start the deal?
REITs are not something new for Indonesians’s real estate companies. In 2006, PT. Lippo Karawachi, Tbk, a sister company of Lippo Group issued for the first time First Real Etsate Investment Trust (First REIT) in Singapore. The First REIT own three hospitals, including Siloam Hospitals Lippo Karawaci, Siloam Hospitals West Jakarta, Siloam Hospitals Surabaya and one hotel, which is Imperial Aryaduta Hotel & Country Club. All the above assets are located in Indonesia. After being listed in Singapore Exchange, First REIT then acquired other three properties located in Singapore. The assets value of First REIT as of September 2007 at Sin $ 325.6 million, showing an increase of Sin $ 17.6 million over its book value.
In 2007, Lippo Group also listed its second REITs in Singapore. Lippo plans to list three more REITs in Singapore Exchange in the next two to three years. The assets will include several retail malls in Indonesia and China. The total new portfolio size of Lippo’s three new REITs will be about Sin $ 4 billion.
Lippo Group is not the only Indonesia’s real estate company that is interested in listing REITs in Singapore. Salim Group and Sinar Mas Group have also had early talks to list REITs in the city-state since 2006. Perdana Gapuraprima Group another prominent real estate company in Indonesia is also looking to list REITs on the Singapore Exchange this year. The REITs will be a joint venture with Amanah Raya Berhad, a company owned by the government of Malaysia. The REITs will have the assets of five malls from Perdana Gapuraprima located in Indonesia and other two malls from Amanah Raya located in Malaysia.
While Singapore has been successful in attracting Indonesia’s real estate companies to list REITs in Singapore Exchange, Indonesia could also do the same. The Indonesia Stock Exchange can look for any potential onshore deal from Indonesia’s real estate companies and ask the authorities to overcome all hurdles.
Catatan: kolom ini pernah dimuat di majalah Asian Property Investment
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