OREANDA-NEWS. The establishment of real investment trusts (REITs) by Indonesian developers is gaining momentum, with the Ciputra group being the latest to take steps towards entering the market, and Fitch Ratings views the move as positive for the real-estate sector in Indonesia.

The successful creation of a REIT market could give developers with significant investment property portfolios an additional source of funding. The government plans to pave the way by providing incentives to support development of the REIT market in Indonesia, including scrapping double taxation on REIT dividends and cutting sales taxes and stamp duties on asset transfers within a corporate group (see Indonesia Property Watch - 4Q15 dated 8 April 2016).

The Ciputra group, which holds about IDR15trn (USD1.1bn) of investment properties in Indonesia, recently announced plans to merge its publicly listed entities into the parent, PT Ciputra Development Tbk (CTRA). It plans to do this by swapping shares in PT Ciputra Surya Tbk (CTRS) and PT Ciputra Property Tbk (CTRP) for shares in the merged entity. This will simplify the group structure, which will make the CTRA more attractive to equity investors and increase liquidity of the company's stock.

Fitch expects the merger to provide CTRA full access into the operating cash flows of the subsidiaries and aid it in creating REITs. However, the move would be contingent upon the government's reduction of asset transfer taxes, and the ability to carry out the merger fully through share swaps with no cash outflow.

It is still not clear when the tax reduction plans will be implemented because several state governments, which collect the stamp duties, oppose the plan. The government first announced the tax cuts as part of the 11th economic stimulus pack in March 2016, saying it would reduce sales tax and stamp duties on asset transfers within a corporate group to 0.5% and 1%, respectively from the current 5% each. Without the tax reductions, the Ciputra group would have to pay 10% tax on the asset transfers, which presents an obstacle to the merger as PT Ciputra Surya Tbk (CTRS) owns land and real-estate assets in its name.

Nonetheless, a successful execution of the merger would give the Ciputra group greater control over its assets, which will allow CTRA greater ease in selling investment assets to a new REIT, and provide the company with an additional stream of public non-debt funding. Currently, the public free float of CTRS is 37.3% and that of CTRP is 41.9%. CTRS and CTRP have EBITDAs of IDR695bn and IDR761bn respectively. The share swaps would minimise the risks of cash outflows during the merger.

The Ciputra group's plan follows the proposal by the Lippo group to set up an Indonesian REIT holding up to IDR6trn of properties over the next two years. The first stage of this REIT proposal, which would encompass three office buildings in the greater Jakarta area, is expected to raise IDR1.5trn. Should the government's incentives be successfully passed, Fitch expects more developers with large investment property assets, such as PT Bumi Serpong Damai Tbk (BB-/Stable), PT Pakuwon Jati Tbk (BB-/Stable) and PT Summarecon Agung Tbk, to also set up REITs to gain access to an additional source of funding.