Mon | Jul 6, 2020

A decade on, Kingston Properties still pitching for REIT incentives, legislation

Published:Wednesday | April 25, 2018 | 12:00 AMAvia Collinder
Kevin Richards, CEO of Kingston Properties Limited.

This August will mark a decade since Kingston Properties Limited, which trades as KPREIT, made its debut on the stock market as a pioneer real estate investment trust in the business of managing income-generating property.

It still remains the only listed REIT, although another listed company, Proven Investments Limited, launched its own subsidiary through which it invests in real estate development.

But Kingston Properties is still hoping that will change, that more investors will be drawn into the sector, saying it just requires the right type of incentives.

Although the company has been pushing for legislation since its own formation, with no success, it is gearing up to press its case once again at the new Minister of Finance, according to CEO Kevin Richards, who says they await feedback from the finance ministry.

However, the that ministry referred the Financial Gleaner to the Ministry of Economic Growth & Jobs for comment, suggesting that the issue is being pursued by the latter.

Kingston Properties has been lobbying the Government to develop and table legislation that would allow the payment of dividends at the same level as other REITs internationally, mainly through tax credits.

In the United States, for example, a REIT must distribute at least 90 per cent of its taxable income to shareholders each year as dividends, according to information on the Securities & Exchange Commission website. The REIT is then permitted to deduct the dividends paid to shareholders, which means it would effectively be taxed on only 10 per cent of that income.

But in Jamaica, REITs are subject to the same 25 per cent corporate rate as other companies.

Kingston Properties' sales pitch to the Jamaican Government is based on the contribution of real estate to economic growth, but also the structure of REITs, which allows a broader base of investors to participate in property investments.

"REITs are a major catalyst for economic growth as it allows for greater participation in the real property sector by both individuals and institutions," said Richards. "There are two important advantages for REITs, the first being taxation relief for the REIT itself and second being the high levels of distribution to REIT shareholders that could be as high as 90 per cent of net profits," he told the Financial Gleaner.

Up to recently, a third Jamaican company -- GraceKennedy Limited -- was expected to develop its own REIT around its real estate holdings. But the conglomerate has now nixed that plan, having taken advantage of another tax incentive programme offered by the state.

"We are not pursing the REIT initiative at this time. Our investment in the new corporate headquarters of US$25 million or over J$3 billion has allowed us to recognise tax credits under Jamaica's Urban Renewal (Tax Relief) Act in 2017, with additional credits in 2018," said Group CEO Don Wehby.

"Our investment will be funded through a mix of debt and equity; the necessary arrangements are already in place," he said.

Still, Kingston Properties has remained optimistic, saying in its annual report for 2016 that "preliminary discussions have been favourable".

Added Richards: "I believe the ministry started some work on it, however, we are revisiting it now that there is a new minister."

But even in the absence of legislated incentives, Kingston Properties has found that within the three markets where it operates, it already gets better tax treatment in Jamaica and the Cayman Islands than it does in Florida, according to Richards.

"There is no state income tax in Florida, however, we are subject to deferred income taxation in the US that ranges up to 35 per cent on capital gains," he said. "Our investments in the Cayman Islands are not directly subject to income or capital gains taxes," he added.

Consequently, the company has been decreasing its holdings in Florida, while building up its portfolio of properties in Jamaica and Cayman.

"Both Jamaica and the Cayman Islands now represent a larger per cent of the total property portfolio, as we de-emphasise our investments in the US, and we are pursuing opportunities in those countries as well," the Kingston Properties CEO said.

At year ending December 2017, the company held 139,878 square feet of mixed use real estate in its three markets, with Jamaica and Cayman accounting for just over 50 per cent of its holdings.

In the meantime, Kingston Properties is taking steps to ramp its dividend distributions to investors in the company, the largest of which include several pension funds. Its board of directors has committed to reviewing level and frequency of payouts on a yearly basis "in a bid to move closer to the standard for REITs globally", as noted in its 2016 annual report.

That year, Kingston Properties distributed 38 per cent of its profits to shareholders, but the distributions dipped to 32 per cent in 2017.