PHILIPPINES REAL ESTATE INVESTMENT TRUSTS (P-REITS)

Brief History

REITs was created in 1960 under the government of US President Dwight Eisenhower. In comparison, the first formal Stock Exchange was established in Amsterdam in 1602.

That makes REITs relatively young at 57 years old, the same age as our previous president, Nonoy Aquino, while the Stock Exchange is already 415 years old.

To put things in perspective, the great Filipino hero, Jose Rizal, studied Philosophy and Letters at UST in 1877, 83 years before the creation of the first REIT.

On the 20^th of January 2013, I wrote an article about REITs, a short one, you could read it here: WHAT? PHILIPPINES REAL ESTATE INVESTMENT TRUSTS (REITs) – LONG OVERDUE!

4 long years have passed and still, Philippine REITs are in limbo.

Philippine Definition: Real Estate Investment Trust Act of 2009

Real Estate Investment Trust’ or “REIT’ is a stock corporation established in accordance with the Corporation Code of the Philippines and the rules and regulations promulgated by the Commission principally for the purpose of owning income-generating real estate assets.

For purposes of clarity, a REIT, although designated as a “trust”, does not have the same technical meaning as “trust” under existing laws and regulations but is used herein for the sole purpose of adopting the internationally accepted description of the company in accordance with global best practices.

How It Works

REIT was created with mutual funds as the basic blueprint. The people behind REIT wanted to generate income from a diversified portfolio of real estate assets, much like a Mutual Fund earns profit from investing in a diversified pool of stocks.

There are 3 types of REIT; Equity, Mortgage and Hybrid.

Equity REIT earn profit through the collection of rental payments, Mortgage REIT earn through the interest rate paid by mortgagees and the Hybrid REIT is a combination of Equity and Mortgage.

REIT is made up of corporations, similar to that of SMDC, Ayala Land Inc or Megaworld Corporation.

Once a REIT-specific corporation (i.e. SM REIT or Ayala REIT) is setup, they will have to offer shares to the public through an Initial Public Offering. After they have accumulated the necessary funds, they will then invest it in the purchase, development, disposition, management or mortgage of real estate properties.

Each and every share that they will issue to the public will serve as a portion of ownership in the real estate properties that they invest in. By law, REITs need to distribute 90% of their taxable income to the public through dividends.

The Deal

The most popular form of REIT is ‘Equity REIT’. This is the type that invests in the ownership and management of malls, hotels, commercial buildings and warehouses. The primary source of income comes from the rental payments of tenants.

As an example, if the SM group created a REITs specific company (i.e. SM REIT), an investor will hypothetically have a share in the rental profit of future SM Malls. Knowing SM Malls have 100% occupancy rates, it’s easy to predict future income stream.

REIT investors have the benefit of having experts manage the day-to-day operations of the real estate properties. These investors will not have the headache of fixing broken plumbing and wirings nor do they have to deal with tenants and ask for rent.

REITs earn every month, quarter or year and 90% of their taxable income are distributed to investors. Even if the real estate industry experience a downturn, the REITs will still need to payout dividends. In a worst case scenario, an investor can hold on to his or her REIT shares, earn profit from the dividends, wait for the industry to bounce back and then sell the shares at breakeven points or for a higher price.

Fees

Like all other investment vehicles, there are fees involved. These are usually composed of REIT manager fees & property manager fees.

According to the REIT Act, under Article 2, Section 8.18:

Fund Manager and Property Manager Fees – Fees received by the REIT fund manager and the REIT property manager from the REIT shall not exceed one percent (1%) of the net asset value of the assets under management.

REITs Vs. Stocks

Both REITs and stocks can be publicly traded in the Philippine Stock Exchange; both offer shares of ownership and both provide dividends.

The stark difference comes from the distribution of dividends; stocks are not required to pay dividends while REITs are.

Taxes

Here’s the current situation:

1. Corporate Income Tax is currently pegged at 30% of a company’s Net Taxable Income.
2. Dividends issued to a Filipino individual or resident alien are taxed at 10%, while dividends issued to domestic and foreign-resident corporations are exempted from the tax.

Here’s the advantage:

1. A REIT-specific corporation will distribute 90% of its income to its shareholders, the remaining 10% income will be the only one left to receive the 30% tax.
2.  Since the REIT-specific companies are domestic, they will be exempted from the dividend tax.

Other Taxes

1. IPO Tax – 1 to 4% of the gross proceeds of the IPO.
2. Stock Transaction Tax – 1/2 of 1% of the gross selling price or gross value in money of the shares of stock sold.

Asia-Pacific Countries With REITs

1. Australia
2. Hong Kong
3. India
4. Japan
5. Malaysia
6. Philippines
7. Singapore
8. Thailand

Benefits To The Philippines

There would be 3 main beneficiaries once REIT-specific companies are established in the country:

1. REIT Companies: They’re the first in line to reap the benefits. Majority of these REITs will be composed of old, well-funded companies, like SMDC, Ayala Land, Century Properties, Rockwell Land, Megaworld, Robinsons Land and Shang Properties Realty Corporation.They will have a new avenue to raise funds without borrowing from banks or foreign investors.
2. Local and Foreign Investors: REITs will offer the public an alternative way to invest in the local real estate industry. Owning a share of a REIT would mean being part owner of the actual mall, condo building, commercial establishment or office building, without the attached responsibilities like that of a landlord. Investors will be given 2 ways to earn a profit: First is through the annual dividend payout, second is through the sale of the actual REIT shares.
3. Government: REITs will have the opportunity to invest in real estate properties across the country. They will be able to develop new buildings and infrastructures outside of Manila, benefiting the local governments.The Bureau of Internal Revenue will also have a new source of taxable entities.

The Warning

While the government and private sector iron out the issues and try to come into an amicable agreement this year, there is already a looming disaster. If and when these REITs take over the leasing management of their residential and commercial buildings, the local brokerages may start to go out of business. Here in Metro Manila, there is a thriving community of rental/leasing specific brokerages and professionals, these businesses and people will be at risk of losing business once REITs step foot into their turfs.

Currently, SM and Ayala Malls have internal leasing departments that handle the acquisition and maintenance of tenants. Brokers outside of these organizations do not have access to available units and if there are interested tenants, they usually by-pass brokers and go directly to the leasing departments. REITs may apply this exact same strategy to their residential and commercial buildings, forcing brokers out.

It’s still uncertain if they will go in this direction, but, in case they do, may this serve as a warning.