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Structuring the investment

Real estate investment entities in Singapore commonly take the form of real estate investment trusts (REITs), business trusts, stapled entities or (private) companies.

Up to the date of this article, REITs are the most heavily regulated in terms of business operations; however, at the same time, REITs listed on the Singapore stock exchange (SGX-ST) are accorded the most favourable tax treatment. On the other hand, business trusts and limited liability companies offer unitholders and shareholders respectively the benefit of limited liability. Following MAS's issuance of a Consultation Paper on the Proposed Framework for Singapore Vehicle Capital Companies on 23 March 2017, a new corporate structure known as the variable capital company (VCC), which is a synthesised creature of the common forms of real estate investment entities, seeks to spearhead Singapore as a frontrunner full-service international fund management centre.

i Limited liability company

Investment in real estate in Singapore can be done by way of a special purpose vehicle company that holds the title to the real estate. However, the distinction between a Singapore company (as defined in the RPA) and a foreign company is critical. While both types of companies can hold immovable property in Singapore, only a Singapore company may own and hold restricted residential property.

Companies are primarily regulated under the Companies Act of Singapore (CA), and the advantages of relying on a corporate structure to invest in real estate are as follows: it has a separate legal personality such that the company has the capacity to sue and be sued, separate from its shareholders; and it offers limited liability protection for the shareholders (i.e., each shareholder is only liable up to the extent of his or her shareholding).

On the other hand, there are restrictions on the powers of certain companies to hold land. For instance, a company formed for objects not involving the acquisition of gain by itself or by its individual members shall not acquire any land without the approval of the Minister for Finance. In addition, a company generally does not enjoy favourable tax treatment and would be liable for the payment of income tax and goods and services tax (where applicable).


REITs are unit trusts that may be either listed or unlisted and that invest or propose to invest primarily in real estate and real estate-related assets. Essentially, capital is provided by investors in exchange for units in the REIT, and the acquired assets are held by the trustee as a trust property but are managed by a manager.

REITs are regulated by Part XIII of the Securities and Futures Act of Singapore, the Code of Collective Investment Schemes (CIS Code) published by the Monetary Authority of Singapore (MAS) in 2014 (and last revised by the MAS on 1 January 2016) and the Singapore Code on Takeovers and Mergers of Singapore (Takeover Code) published by the MAS in 2012 (and last revised by the MAS on 25 March 2016). In addition, REITs listed on the SGX-ST are required to comply with the SGX-ST Listing Manual. Although listed REITs are structured as trusts, they have their redeemability feature suspended while they are listed: in other words, unitholders of listed trusts can only exit from their investments by selling them on the SGX-ST. As of 30 November 2017, there were 34 listed REITs in Singapore, which span across the industrial, office, hospitality and retail sectors.

Under the CIS Code, real estate investments and activities undertaken by REITs are subject to the following restrictions:

  1. at least 75 per cent of their deposited property should be invested in income-producing real estate;
  2. they should not undertake property development activities or invest in unlisted property development companies unless they intend to hold the developed property upon completion;
  3. they should not invest in vacant land and mortgages; and
  4. the total contract value of activities and investments undertaken in accordance with (b) should not exceed 10 per cent of their deposited property (with effect from 1 January 2016, such value may exceed 10 per cent of the property fund's deposited property, subject to a maximum of 25 per cent of the property fund's deposited property) provided certain conditions are satisfied.,

Although REITs are allowed to borrow for investment purposes and may mortgage their deposited property to secure such borrowings, the CIS Code provides that their total borrowings and deferred payments (collectively, aggregate leverage) should not exceed 45 per cent of their deposited property. The borrowing limits for REITs with effect from 1 January 2016 have to be seen in light of the amendments to the REITs regulatory regime. Under the Takeover Code, any party intending to acquire 30 per cent or more of the total units of a REIT, or any party holding not less than 30 per cent but not more than 50 per cent of the total units of a REIT, intends to acquire more than 1 per cent of the total units of the REIT in any six-month period, should make a general offer for all units in the REIT.

Listed REITs, unlike other investment entities, are accorded favourable tax treatment in Singapore. First, trustees of listed REITs that distribute at least 90 per cent of their taxable income to unitholders in the same year in which the income is derived and obtain a tax ruling from the Inland Revenue Authority of Singapore (IRAS) are not required to pay income tax on such distributed income. Second, individual unitholders need not pay income tax in respect of distributions from the taxable income of listed REITs, regardless of their nationality or tax residence status. Third, withholding tax on REIT distributions to foreign non-individual investors would be lowered from 20 to 10 per cent until 31 March 2020. In early 2015, the government decided to extend the tax concessions for REITs, which were scheduled to expire on 31 March 2015, save for the stamp duty concessions, which have since lapsed.

However, the CIS Code does not require the trust deed of REITs to provide that the liability of investors should be limited to their investment in the scheme. Therefore, unlike the beneficiaries of business trusts and shareholders of limited liability companies, unitholders of REITs could conceivably be liable to creditors for the debts of the REIT.

One of the amendments proposed by MAS, which took effect from 1 January 2017, was that REIT managers and individual directors would now be subject to a statutory duty to prioritise the interests of REIT unitholders over those of the REIT manager and the shareholders in the event of a conflict of interest. The imposition of such a statutory duty would be in line with the current obligations on trustee managers under the Business Trust Act of Singapore (BTA).

iii Business trust

Business trusts are business enterprises structured as trusts and are regulated by the BTA. They may be listed on the SGX-ST and, when so listed, will have to comply with the SGX-ST Listing Manual. In addition, the Takeover Code will, unless waived by the Securities Industry Council, apply to listed registered business trusts and unlisted registered business trusts with more than 50 unitholders and net tangible assets of S$5 million or more.

As with REITs, capital in a business trust is contributed by investors in exchange for units in the business trust. However, legal ownership and management of the acquired assets are vested in one single entity: the trustee manager.

The investments, activities and borrowings of business trusts are not subject to any restrictions under the BTA and as such, business trusts, unlike REITs, are free to hold various assets, undertake developments and borrow more than 60 per cent of their deposited property without a credit rating.

In addition, the compulsory squeeze-out acquisition of minority unit holdings is also permissible under the BTA. Therefore, an offeror who is making a general offer for units in the business trust will be able to compulsorily acquire the units of the dissenting minority if he or she has obtained acceptances in respect of more than 90 per cent of the units offered.

An advantage of the business trust is that unitholders, like shareholders of limited liability companies, are entitled to limited liability notwithstanding any provision to the contrary in the trust deed of the business trust.

However, business trusts do not enjoy the same favourable tax treatment offered to REITs. Another disadvantage of the business trust structure is that unitholders may have limited ability to ensure proper corporate governance, as a 75 per cent majority vote of all unitholders is required to remove a trustee manager and, in practice, the sponsor group often retains a significant holding of units sufficient to block any such vote. In contrast, the CIS Code requires the trust deed of REITs to provide that the manager may be removed by way of a resolution passed by a 50 per cent vote of unitholders present and voting at a general meeting.

iv Stapled entity

A REIT may be stapled with a business trust under a stapling deed to form a stapled entity that issues stapled securities. The combined entity will be traded under one trading name, and the two different securities stapled together cannot be traded separately thereafter except in de-stapling events such as termination of the trust.

With effect from 1 January 2016, MAS has imposed a further requirement that the REIT have a sufficient nexus to the non-REIT entity with active operations that it will be stapled to. Such a nexus may be established so long as both are in the same industry or if the entity with active business operations is operating a business or providing a service ancillary to the assets held by the REIT.

Although the stapled structure is recognised by regulators as an allowable listing structure, the underlying securities retain the rights and obligations attached to each of the individual securities. For example, from a tax perspective, the REIT component of the stapled entity will be eligible for REIT-specific tax concessions, while the non-REIT component (i.e., the business trust) will continue to be taxed under normal tax rules.

Stapled entities may appeal to investors who value the business and income diversification benefits brought about by such a combination. To a certain extent, the stapled structure combines the best of both a REIT and a business trust.


VCCs would be recognised as corporate entities incorporated under a VCC act, which administration will be by the Accounting and Corporate Regulatory Authority except where anti-money laundering/combating the financing of terrorism matters are concerned in which case they shall be administered by MAS.

The VCC may take the form of a standalone fund or an umbrella fund with multiple sub-funds, in both instances they shall be regarded as a single legal entity. In the latter, economies of scale may be enjoyed as such structures allow common resources to be shared among multiple sub-funds.

VCCs, unlike companies, are able to vary their capital without having to seek shareholders' approval. Although for tax purposes, VCCs shall be treated as a company and a single legal entity where they are able to enjoy the tax incentives for funds.

Unlike REITs, they are able to safeguard shareholders' liabilities given the sub-fund's assets and liabilities are ring-fenced. This limits shareholders' liabilities to their investments in the fund, as assets belonging to one sub-fund cannot be used to discharge the liabilities of another sub-fund belonging to the same umbrella VCC.

Foreign investment

i Acquisition of property

Land in Singapore may be zoned for residential, commercial or industrial purposes. In general, there is no restriction on foreign ownership of commercial or industrial property. However, when a foreign person seeks to transfer, purchase or acquire restricted residential property, the Residential Property Act of Singapore (RPA) provides that approval by the Minister for Law must first be obtained. For the purposes of the RPA, a foreign person includes a company incorporated in Singapore if the company has directors or members who are not Singapore citizens.

Even if approval from the Minister for Law is granted, foreign persons may be required to use the residential property only for their (and their families') occupation, or for their employees' (and their employees' families') occupation; or ensure that the estate or interest in the residential property is not sold, assigned, transferred or otherwise disposed of within a certain period, among other conditions.

In Singapore, there is a relatively high additional buyer stamp duty of 15 per cent that is levied on foreign purchasers of residential properties. Nonetheless, despite the substantial stamp duty, there remains strong demand for Singapore residential properties from foreign purchasers. This is likely because of the levelling of taxation costs overseas, especially because other popular overseas destinations have also imposed restrictions to curb international demand for property. Singapore's tax rate hence appears lower, and is able to continue to attract foreign investors.

ii Development of property

Foreign persons who wish to purchase residential property for the purpose of constructing flats or dwelling houses for sale must apply to the Controller for Residential Property for approval. Such approval, if granted, may be conditional on: (1) the development being completed within a certain prescribed period; (2) all units in the development not being sold to Singapore citizens or companies within two years from the date a temporary occupation permit is issued under the Building Control Act of Singapore; and (3) where the foreign person is a company, its shares or any interest in such shares shall not be sold, assigned, transferred or otherwise disposed to any other person. Because the failure to complete the development within five years and sell all the units within another two years of obtaining temporary occupation permit for the development could result in foreign developers facing hefty penalties (including the forfeiture of a banker's guarantee equivalent to 10 per cent of the land purchase price), the developers may exert further downward pressure on property prices to avoid such consequences.

Notwithstanding parts (1) and (2) above, foreign persons are allowed to acquire the following without having to comply with the requirements of the RPA: a mortgage, charge or reconveyance of residential property; and residential property by way of tender or otherwise from the Urban Redevelopment Authority of Singapore (URA) or any person or body that is duly appointed as an agent of the government.