TAXATION RELATING TO DIRECT AND INDIRECT REAL ESTATE INVESTMENT - SINGAPORE AND HONG KONG

Abstract

In the international arena, cross-border acquisitions have highlighted the need for property investors to manage their tax liabilities efficiently. In Asia, comparisons have always been drawn between Singapore and Hong Kong as to which is a more favorable city for investment. This study thus analyses the impact of taxation on both direct and indirect real estate investments in these two cities. The focus will be on investment in prime office space (direct investment) as opposed to buying shares of listed propertyholding companies (indirect investment). Quantitative analysis is carried out using an ex-post illustration from 1990 to 1999. Results of this study show that although taxes do affect the after-tax returns of investment, it is not the primary determinant. The reversionary cash flow during disposal, which constitutes a substantial proportion of the total cash flows received, is the core factor that determines the choice of the investment. In addition, it can be concluded that investment via holding a portfolio of shares in Hong Kong yields the highest return. This is due to its high dividend income and share price appreciation. Tax exemption for dividend income further contributes to the attractiveness of this option. For the other 3 options, all three yield negative net present values. This is because property prices and Singapore property share prices dipped at the time of sale for the period under study. Hypothetical examples of different holding periods provided evidence to show that capital appreciation is the driving force behind these investments. Although tax is not the determining factor, its importance cannot be underestimated, as this is a useful tool frequently used by Governments to regulate the property market and to attract foreign capital.