Annisa Suci Ramadhani[1]
The Dana Investasi Real Estat (DIRE) or Real Estate Investment Trust (REIT) remains unpopular in Indonesia, while in terms of growth, it still lags behind other ASEAN countries such as Singapore and Malaysia. Even though a number of policies aimed at supporting the issuance of DIRE are set out in the government’s 11th Economic Policy Package, while several tax regulations have been issued in order to offer a number of tax incentives to DIRE,[2] to date, only three DIRE have been issued in Indonesia. The largest and most recent DIRE to be issued was Simas Plaza Indonesia (PT Sinarmas Asset Management) in 2019, while Jakarta Landmarks Plaza Indonesia, FX Mall and the Grand Hyatt have been defined as the underlying assets of this DIRE.
However, across the global marketplace, REIT continue to attract a positive outlook from investors as a result of various factors, including: (i) The risk arising from investing in one property decreases when investors invest in REIT, which can comprise diverse property portfolios; (ii) Through the ownership of REIT participation units, an individual investor who has relatively limited capital available can afford to invest in high-value properties such as hotels, malls and convention halls, in comparison with buying/investing directly in high-value assets which require large amounts of capital; (iii) It is easier to transfer, buy or sell REIT participation units as securities than it is to transfer, buy or sell properties; and (iv) In most countries, REIT enjoy tax-relief status (moreover, under certain conditions, individual investors who receive income from REIT investments may also enjoy tax-exempt treatments).
DIRE Structure in Indonesia
Image: Common DIRE Structure
In 2017, Indonesia’s Financial Services Authority (Otoritas Jasa Keuangan - “OJK”) issued Regulation No. 64/POJK.04/2017 which addressed DIRE in the form of Collective Investment Contracts (“Regulation 64/2017”). This regulation revoked the old DIRE regime which was originally put in place by both the OJK and the Capital Market and Financial Institutions Supervisory Agency (Badan Pengawas Pasar Modal dan Lembaga Keuangan/Bapepam - LK). Even though Indonesia does not specifically recognize the concept of trust, a DIRE can be established based on a collective investment contract (“CIC”) which is made by and between the relevant investment manager and custodian bank, and through which the investment manager is granted the authority to manage the collective investment portfolio while the custodian bank is granted the authority to manage the relevant collective deposits.[3]
A DIRE is used as a vehicle in order to raise funds from investors which will subsequently be invested in real-estate assets. As with stock under any equity investment, the investor will hold the participation unit of the CIC as ownership in the DIRE. The DIRE may invest in real-estate assets with or without utilizing any special purpose company (“SPC”) — a type of limited liability company which is owned by the DIRE with at least 99.9% of its paid-up capital and which is represented by an investment manager solely for the benefit of the holders of the participation units.
Protection for DIRE Investors
The DIRE regulation sets out several provisions which specifically address the protection of investors, as follows:
In spite of any perceived preliminary benefits relating to the regulation, a number of risks are also associated with the DIRE structure which are not specifically addressed under Regulation 64/2017 and these risks include the following:
Nevertheless, the absence of these provisions in the regulation opens up the opportunity for parties to specify and monitor the relevant requirements themselves under the relevant CIC, particularly in terms of any covenants or requirements which are deemed beneficial and which will make the DIRE more attractive to investors. Therefore, given the lack of precedent or in-depth regulation in Indonesia, it is essential that both the protection of investors and good corporate governance in terms of the operation of DIRE are clearly addressed under any under CIC. In drafting CIC, there are several approaches that should be considered, including benchmarking with REITs within developed markets, as well as the making of comparisons with the legal framework that governs equity investments.
Disclaimer: The opinions expressed in this article are those of the author and do not reflect the official stance of any organization.
[1] The writer is a managing associate at Melli Darsa & Co. (the Indonesian member law firm of the PwC global network)
[2] In Indonesia in particular, these tax incentives, among others, pertain to the distribution of profit received or obtained by the holders of a participation units under a Collective Investment Contract and are not subject to income tax. Dividends received from a DIRE SPC may be excluded from any calculation of taxable income if they qualify under the relevant tax regulations.
[3] Sri Sunarni Sunarto, Mengenal Lembaga Hukum Trust Inggris dan Perbandingannya di Indonesia, (Bandung: Pusat Penerbitan Universitas LPPM Universitas Islam Bandung, 1994), 13-14. “Although the concept of trust which establishes a clear separation of ownership between the legal owner and the beneficiary owner of the object is not purely recognized in the Indonesian legal system, Prof. Subekti sees several similarities between trust and prevailing legal institutions in Indonesia. This is possible based on Article 1317 of the Indonesian Civil Code, which in principle, states that an agreement applies only to the parties who enter into the agreement, except there is a promise made for a third party under said agreement (beding ten behoeve van derden).”
[4] Art. 7 (1), Regulation 64/2017.
[5] Art. 15 (1-2), Regulation 64/2017.
[6] Art. 13, Regulation 64/2017.
[7] Art. 22, Regulation 64/2017.
[8] Art. 18 (1), Regulation 64/2017.
[9] Art. 16, Regulation 64/2017.
Annisa Suci Ramadhani[1]
The Dana Investasi Real Estat (DIRE) or Real Estate Investment Trust (REIT) remains unpopular in Indonesia, while in terms of growth, it still lags behind other ASEAN countries such as Singapore and Malaysia. Even though a number of policies aimed at supporting the issuance of DIRE are set out in the government’s 11th Economic Policy Package, while several tax regulations have been issued in order to offer a number of tax incentives to DIRE,[2] to date, only three DIRE have been issued in Indonesia. The largest and most recent DIRE to be issued was Simas Plaza Indonesia (PT Sinarmas Asset Management) in 2019, while Jakarta Landmarks Plaza Indonesia, FX Mall and the Grand Hyatt have been defined as the underlying assets of this DIRE.
However, across the global marketplace, REIT continue to attract a positive outlook from investors as a result of various factors, including: (i) The risk arising from investing in one property decreases when investors invest in REIT, which can comprise diverse property portfolios; (ii) Through the ownership of REIT participation units, an individual investor who has relatively limited capital available can afford to invest in high-value properties such as hotels, malls and convention halls, in comparison with buying/investing directly in high-value assets which require large amounts of capital; (iii) It is easier to transfer, buy or sell REIT participation units as securities than it is to transfer, buy or sell properties; and (iv) In most countries, REIT enjoy tax-relief status (moreover, under certain conditions, individual investors who receive income from REIT investments may also enjoy tax-exempt treatments).
DIRE Structure in Indonesia
Image: Common DIRE Structure
In 2017, Indonesia’s Financial Services Authority (Otoritas Jasa Keuangan - “OJK”) issued Regulation No. 64/POJK.04/2017 which addressed DIRE in the form of Collective Investment Contracts (“Regulation 64/2017”). This regulation revoked the old DIRE regime which was originally put in place by both the OJK and the Capital Market and Financial Institutions Supervisory Agency (Badan Pengawas Pasar Modal dan Lembaga Keuangan/Bapepam - LK). Even though Indonesia does not specifically recognize the concept of trust, a DIRE can be established based on a collective investment contract (“CIC”) which is made by and between the relevant investment manager and custodian bank, and through which the investment manager is granted the authority to manage the collective investment portfolio while the custodian bank is granted the authority to manage the relevant collective deposits.[3]
A DIRE is used as a vehicle in order to raise funds from investors which will subsequently be invested in real-estate assets. As with stock under any equity investment, the investor will hold the participation unit of the CIC as ownership in the DIRE. The DIRE may invest in real-estate assets with or without utilizing any special purpose company (“SPC”) — a type of limited liability company which is owned by the DIRE with at least 99.9% of its paid-up capital and which is represented by an investment manager solely for the benefit of the holders of the participation units.
Protection for DIRE Investors
The DIRE regulation sets out several provisions which specifically address the protection of investors, as follows:
In spite of any perceived preliminary benefits relating to the regulation, a number of risks are also associated with the DIRE structure which are not specifically addressed under Regulation 64/2017 and these risks include the following:
Nevertheless, the absence of these provisions in the regulation opens up the opportunity for parties to specify and monitor the relevant requirements themselves under the relevant CIC, particularly in terms of any covenants or requirements which are deemed beneficial and which will make the DIRE more attractive to investors. Therefore, given the lack of precedent or in-depth regulation in Indonesia, it is essential that both the protection of investors and good corporate governance in terms of the operation of DIRE are clearly addressed under any under CIC. In drafting CIC, there are several approaches that should be considered, including benchmarking with REITs within developed markets, as well as the making of comparisons with the legal framework that governs equity investments.
Disclaimer: The opinions expressed in this article are those of the author and do not reflect the official stance of any organization.
[1] The writer is a managing associate at Melli Darsa & Co. (the Indonesian member law firm of the PwC global network)
[2] In Indonesia in particular, these tax incentives, among others, pertain to the distribution of profit received or obtained by the holders of a participation units under a Collective Investment Contract and are not subject to income tax. Dividends received from a DIRE SPC may be excluded from any calculation of taxable income if they qualify under the relevant tax regulations.
[3] Sri Sunarni Sunarto, Mengenal Lembaga Hukum Trust Inggris dan Perbandingannya di Indonesia, (Bandung: Pusat Penerbitan Universitas LPPM Universitas Islam Bandung, 1994), 13-14. “Although the concept of trust which establishes a clear separation of ownership between the legal owner and the beneficiary owner of the object is not purely recognized in the Indonesian legal system, Prof. Subekti sees several similarities between trust and prevailing legal institutions in Indonesia. This is possible based on Article 1317 of the Indonesian Civil Code, which in principle, states that an agreement applies only to the parties who enter into the agreement, except there is a promise made for a third party under said agreement (beding ten behoeve van derden).”
[4] Art. 7 (1), Regulation 64/2017.
[5] Art. 15 (1-2), Regulation 64/2017.
[6] Art. 13, Regulation 64/2017.
[7] Art. 22, Regulation 64/2017.
[8] Art. 18 (1), Regulation 64/2017.
[9] Art. 16, Regulation 64/2017.