A Real Estate Investment Trust (REIT) is a corporation that derives most of its revenue from owning or managing real estate. The REIT structure was designed to provide a framework for investment in real estate in the same way that mutual funds provide for investment in stocks.
Likewise, the Senate Bill No. 63 known as “The Real Estate Investment Trust Act of 2007” defined REIT as a stock corporation formed for the sole purpose of investing in income-producing real estate assets. Income producing properties include apartment buildings, office buildings, warehouses, medical facilities, hospitals, mixed industrial/office buildings and other commercial and residential properties.
The bill has been recently referred to the Senate’s Committee on Banks, Financial Institutions and Currencies and the Committee on Ways and Means.
As explained in the bill, institutionalization of the REITs would allow the Philippines to participate in the globalization of the real estate investment markets thus contributing to the growth and development not only of the capital market but also the national economy through increased investment activities.
The Real Estate Investment Trust Act of 2009 (RA 98501) was also passed into law on December 17, 2009. Its Implementing Rules and Regulations were approved by the Securities and Exchange Commission in May 2010.
The proposed bill is timely as we are experiencing yet another boom in the real estate industry and the playing field is now open to all kinds of investors.
REITs are mandated to have at least 1,000 public shareholders, each owning at least 50 shares, to be considered a public company. In aggregate, they must have a 40% minimum public float, to be increased to 67% within three years from listing.
This put off real estate firms unwilling to dilute their ownership of long-held businesses. The private sector had initially lobbied for a 33.33% ownership requirement, but the government said a higher floor would allow more people to invest in REITs.
Another perk for REITs is that they are allowed to distribute at least 90% of their income to shareholders, bringing down income tax obligations. Again, this benefit is matched with an escrow equivalent to the income tax due if dividends hadn’t been taken out.
The REIT is very important to the Philippine economy. It would give a bigger boost to the real estate sector as more investors would bring more capital into the country.
Several analysts pointed out that the Philippines should take a closer look of REIT as it has been proven to be a successful model for growth in countries in the region such as Japan, Singapore, and Malaysia, and its absence is seen as a major barrier to the growth of the property that also affects the capital market of the country.
In order for the REIT to attract capital, the Philippine government must have a tax appropriate rate environment.
And also, if the REIT is implemented, the Philippine real estate sector can experience inflows as much as $500M in fresh foreign capital within 1 year.
In the APREA Summit last year, Philippine Stock Exchange President and CEO, Hans Sicat, said that the issuance of REIT may have to wait until our country gains the sought after investment grade credit grade rating, which will be a 12-month period. He also said that PSE expects the property developers to continue ignore REIT because of the current tax issues. He doesn’t think that BIR will back down because of fear that they may lose revenues due to current tax rules.
REIT is a good vehicle for capital formation but Finance Secretary, Purisima and BIR Commissioner, Kim Henares, killed and spoiled the Philippine REIT with stiff tax requirements and regulations on ownership. The result, as what Mr. Sicat said, is zero.
As compared with other Asia Pacific REIT that are listed in Japan, Australia, Singapore, and Thailand, they have proven to be a success, not only to the proponents but also to investors, public, and government from tax collections that have reached billions of US$.
As usual, some of our government policies, regulations, and laws are contradictory and in conflict to the administration program to attract direct foreign investments to the Philippines. But this will not happen if we do not remove this myopic outlook of putting restrictions to incentives for capital investments.
Mr. Sicat remained optimistic despite the lack of progress on PSE and DOF discussion. “We have been trying to work with them but I don’t think you will see the REIT product anytime soon,” he said.
He also advised the real estate players to continue the advocacy by pursuing amendments of law, convincing the government of the multiplier effect, softening the constraints, and keeping the channels open. Mr. Sicat also said that with a robust banking sector and a lot of liquidity, funding is still possible.
In order for the Philippines to benefit from the foreign investments, policymakers and the private sector would have to restart stalled talks on the local issuance of REITs, which have faltered due to the Department of Finance’s opposition to the tax-exempt status granted to it by law.
In recent developments, because regulators wants to amend the REIT Act, changes to the REIT Act will be pushed in the next Congress as there are still no takers for the instrument despite its rollout a year and a half ago. The Securities and Exchange Commission (SEC) will come up with the draft bill that will be filed once the Congress resumes it session in July.
One of the amendments needed is the need for a REIT Manager independent from property developers. It could also include the minimum public float requirements set under the SEC’s implementing rules and regulations in May 2010.
The alternative investment vehicle was launched with much fanfare, with the government keen on attracting more participants to the capital markets. The law and its subsequent guidelines, however, proved restrictive, turning off interested property developers.
The SEC chief confirmed that no one had applied to form a REIT since the law was implemented in July 2011. Real estate giants such as SM Prime Holdings, Inc., Robinsons Land Corp. and Ayala Land, Inc. initially expressed interest but have since backed off.
The Philippine Stock Exchange said that there’s still overwhelming interest in REITs and they are once again in talks with industry and investment stakeholders to address issues on REIT as it seeks to find a framework acceptable to all.
SOURCE: Philippine Daily Inquirer, Philippine Star, Business World, ABS-CBN, www.punongbayan-araullo.com