REIT time, right investment

REITs could potentially accelerate the property sector’s growth and, at the same time, allow more Filipinos to participate in the ownership of the country’s most profitable real estate assets.

The longer the wait, the sweeter the kiss, so goes the old adage. This might well apply to the Philippine property sector as the real estate investment trust (REIT) landscape finally takes shape in the country.

Indeed, 11 years after Congress passed the REIT Act of 2009, the Philippines will soon see its first REIT listing.

WHAT ARE REITs?

REITs are companies established for the primary purpose of owning income-generating real estate assets like apartments, office buildings, hotels, resorts, warehouses, shopping centers, as well as hospitals, medical facilities, highways and railways.

They must register with the Securities and Exchange Commission (SEC) with a minimum paid-up capital of P300 million and list on the Philippine Stock Exchange (PSE) with at least 1,000 public shareholders each owning a minimum of 50 shares of any class and who, in the aggregate, own at least a third of the outstanding capital stock.

On the one hand, REITs present an attractive investment opportunities for dividend-seeking investors. The REIT Act of 2009 mandates REITs to declare 90 percent of their distributable income as dividends annually.

On the other hand, REITs provide property developers an effective and efficient fundraising tool. Property developers get to recycle their capital by transferring income-generating assets into REITs and eventually selling their shares therein to the public. Under the law, REIT sponsors must reinvest the proceeds in real estate and infrastructure projects in the Philippines.

As such, REITs could potentially accelerate the property sector’s growth and, at the same time, allow more Filipinos to participate in the ownership of the country’s most profitable real estate assets.

LONG WAIT

It took 11 years for the Philippine REIT market to take shape, as stringent public ownership requirements and tax treatment on the transfer of properties put property developers off.

Afraid to lose revenues, the previous administration had imposed the 12 percent value-added tax on transfers of real estate properties to REITs.

Moreover, property developers, which sponsor or contribute to the asset portfolio of REITs, had been required to give up control. Under the previous rules, REITs will have to maintain a 40 percent public float in the first year of their listing and raise it within the next three years to 67 percent.

The Duterte administration supported the easing of the public ownership requirements and tax treatment of REITs and, on January 20, the SEC and the Bureau of Internal Revenue (BIR) finally issued the Revised Implementing Rules and Regulations of the REIT Act of 2009.

Instrumental in pushing for REITs to finally take off under the Duterte administration was Finance Secretary Carlos Dominguez, who has cited REITs as a “powerful financial concept, enabling the creation of investment trusts that purchase, develop and operate income-generating real estate assets.”

REITs are companies established for the primary purpose of owning income-generating real estate assets like apartments, office buildings, hotels, resorts, warehouses, shopping centers, as well as hospitals, medical facilities, highways and railways. Photo by ERNIE PEÑAREDONDO

IS IT THE RIGHT TIME?

And so it begins.

The stumbling blocks have been addressed. But are REITs ripe for the picking? Should real estate companies brave the market and launch their REIT offering at this time?

“From a property company’s point-of-view, now would be a great time to do a REIT offering,” says Raymond Neil Franco, head of research at Abacus Securities Corp., noting that property developers could actually realize higher prices for their assets.

“With interest rates on government debt so low, especially on tenors from five years and above, yield-hungry pension funds and insurance companies might scramble for shares,” Franco says.

Indeed, some of the country’s most aggressive and biggest Philippine property developers have advanced their REIT plans for the year despite and amid a looming economic downturn brought about by the COVID-19 pandemic.

REVIVING THE CAPITAL MARKETS

Over at the PSE, the excitement in the air is almost palpable.

The country’s lone stock exchange is bullish that property developers will finally pursue their REIT plans now that the implementing rules and regulations of the REIT Act of 2009 have been relaxed.

“REITs are a welcome addition to our product offering as they will help our market become more competitive in the region,” PSE president Ramon Monzon says.

The new asset class could provide a much-needed boost to one of Asia’s oldest equity markets yet among the smallest in terms of market capitalization, roster of listed companies and investors.

SHOULD YOU INVEST IN REITs?

With some companies already preparing their REIT offerings, should investors gobble up this new asset class?

It depends on the investor’s goals, according to Abacus’ Franco.

“Is he or she looking for passive income, for capital appreciation or both?” Franco says. “Given that REITs are required to pay out a certain percent of income as dividends, then it is more likely to be appreciated by investors looking for yield. REITs should therefore be classified more like a fixed income security than an equity instrument.”

Apart from the price, Franco says investors should be looking at the quality of the assets in the REIT. The quality of the assets will influence the predictability of earnings, which in turn will affect the payout or the yield.

Investors should also look at other factors such as the potential for capital appreciation, the reputation of the REIT sponsor and probably the most important — the outlook for interest rates.

“The last is very important because, again, REITs are more like fixed-income assets. If interest rates are expected to go up, then REIT prices should be expected to fall,” Franco notes.

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