The Real Estate Investment Trust (REIT pronounced “reet”) Law is not new in the Philippines, it was first introduced in the year 2009, during the Arroyo Administration.
So what happened?
Due to the obstacles brought by the heavy taxation and the high percentage of minimum public ownership (MPO), there was no momentum gained. Potential investors found that the legal and administrative requirements made it difficult for REIT Companies to enter the market.
The concept reemerged today, after a decade of dormancy and is becoming more relevant with the real estate boom in the country. Thanks to the amendments made in the rules and regulations implemented in the REIT Law, there’s no better time to invest in real estate, especially with the Duterte Administration’s Build Build Build (BBB) Program to improve Philippine Infrastructure.
WHAT IS A REIT?
In the Philippines, REIT Companies are referred to as publicly-listed corporations that own and manage real estate operations and infrastructure facilities. They focus on income-generating properties such as condominiums, office spaces, malls, hotels, resorts, hospitals, tollways, highways, and airports. The President and Chief Executive Officer of the Philippine Stock Exchange, Ramon S. Monzon, mentioned that as a major Southeast Asian market, the Philippines is the only country without a REIT industry.
The REIT industry is diverse in profile, hence the amount of investment potential. There are two classifications that REITs usually fall under, equity or mortgage.
Equity REITs own and operate income-generating properties into a portfolio, contrary to what real estate companies do where they resell properties after development. This is the type of REITs expected to establish in the Philippines.
As for Mortgage REITs, they give loans to real estate owners through mortgage-backed securities. This usually works for existing properties, so they profit through managing interest rates and credit risks.
There are also Hybrid REITs, that operate as an equity and mortgage REIT. So depending on their needs, they focus on either more property portfolio or mortgage holdings.
Public Traded REITs are types of equity REIT that offer shares on the national stock exchange for public trading, for the consumption of individual investors. There are also Public Non-traded REITs companies whose shares are not on the national stock exchange. These are less liquid but more stable compared to traded shares. Both are regulated by the Securities and Exchange Commission (SEC).
Private REITs are not regulated by SEC nor traded on national stock exchanges. They are corporations that perform transactions with selected individual investors.
THE REIT LAW
Let’s discuss the government-passed laws.
In 2009, the minimum public float requirement for REITs were a staggering 40%-67%, compared to the 20% that regular corporations have. To make things more difficult, tax is imposed on the transfer of properties.
No wonder that nobody took the risk of starting one.
Last year (2018), the House of Representatives Economic Affairs committee conducted a hearing where officials from the Securities and Exchange Commission (SEC) approved the reduction of the MPO’s percentage to 33%. This was decided after the Bureau of Internal Revenue (BIR) confirmed that initial property transfers to REIT are exempted from value-added tax (VAT), an incentive provided by the Tax Reform for Acceleration and Inclusion (TRAIN) Act (Republic Act No. 10963). The dividends distributed are 90% of earnings for the benefit of the investors, as mandated by the law.
The Cause – So what changed?
The Real Estate Boom has blown into new development projects, like the Build, Build, Build Program; to accelerate the economy. By easing the REIT Law, the establishment of REIT Corporations will encourage investors of every size to invest in local real estate. Due to the financial advantage of owning real estate without buying a property, funding projects become easier while generating returns for investors. By investing in real estate stocks, there is financial inclusion for smaller investors to join the big players in the market.
The Effect – Turning Expectations into Positive Results
- Establishment of pioneering REIT Companies – Due to a strong demand for REIT investors, the largest property developer in the Philippines, Ayala Land, registers with the regulating bodies of the government and the Philippine Stock Exchange, as the first REIT listing in the country. They plan to raise $500 million and have their REIT own office towers in Makati CBD since it remains to be one of the most luxurious property locations in Metro Manila.
- Boost Capital Market – There’s a lot of potential in REITs when they make investing accessible to everyone in the Philippine property market. So whether it’s an average working-class individual or a corporate executive, they have equal opportunities to invest in high-valued assets. Making the ability to invest available for everyone will considerably raise the capital market of the country. The funds generated can be used for newer developments and expansions, especially in rural areas.
- Create Jobs – New developments provide jobs for construction, while other real estate assets create openings in properties like office spaces, schools, hospitals, and infrastructure. In the country, the IT-BPM industry benefited the most from the expansion of real estate, providing work for 5 million direct and indirect employees.
- Global Competitiveness – The Securities and Exchange Commission placed restrictions on REIT investments to local real estate to help develop the economy by making the industry competitive internationally. By removing foreign investments, competition is reduced and investors are encouraged to go local. Furthermore, they will adopt international principles to manage assets in the best standard for innovation and attractive returns.
- Sustainable Market – REITs have the potential to outperform non-REITs and the local market, according to research in Asia Pacific regions like Singapore, Japan, Hong Kong, and Australia. Having a well-established REIT company results in returns higher than the equity’s dividend yield. During recessions, it is still possible to maintain market activity and trade volume. Since it’s sustainable, there is less risk for investors because it has the ability to remain stable compared to other investments.
- Insurer Investors – Companies are given the opportunity to look for ways of raising funds through investments. According to a local news report, the Insurance Commission gave insurance firms and pre-need companies the permission to invest in REIT companies to allow diversity in earnings and investment returns. The industry participates in boosting the country’s economy through capital marketing.
WHAT’S THE TAKEAWAY?
Investors want to grow their money without facing too many risks. With REIT Corporations entering the Philippine market, investors are placing their money on a portfolio of real estate, instead of a single property. Since trade can be done publicly, shares and stocks can be sold and bought easily. Real estate investing is made possible, without the responsibilities of being a landlord and spending a fortune.
How to get started? Buying shares on the public Philippine Stock Exchange.
A real estate broker or advisor should help investors to analyze their goals to determine the best REIT investments.
Technology Evangelist super passionate about helping the industries of eCommerce, SMEs and real estate in the Philippines reach new levels of success.