REAL ESTATE INVESTMENT TRUST (REIT)
What is REIT?
An REIT is a special type of publicly listed corporation,
which purchases, develops, and operates income-
generating real estate assets — such as offices, hotels,
apartment buildings, and malls among others.
What is REIT?
It has two key features, as provided by RA 9856, which
theoretically make it an attractive investment vehicle:
(1) Minimum dividend requirements
(2) Tax incentives.
REITs will also benefit from the documentary stamp
tax exemption recently issued on its original shares of
stock.
What is REIT?
First, REITs are legally required to declare as
dividends 90% of its distributable net income for the year.
Through this provision, shareholders of the trust are,
essentially, exposed to virtually all of the cash flows from
the real estate assets managed by the company. Therefore,
REITs can serve as an attractive alternative mode of
investing in real estate for investors with minimal capital.
What is REIT?
Second, REITs are allowed to claim the dividends it
declared and distributed in the year as a deductible
expense for income tax purposes. Since the entity is legally
required to distribute at least 90% of its realized income per
year, it is as if only 10% of its annual net income is subject
to the regular corporate income tax rate of 30% — leading
to an effective tax rate of around 3% or less. Therefore,
major real estate players in the Philippines can theoretically
reduce their tax burden by establishing and operating their
own REITs.
What is REIT?
Through the key features provided by the REIT Law,
the government aims to incentivize and stimulate private
investment in the Philippine real estate market.
How can it help improve our economy?
According to Philippine Stock Exchange (PSE) president and
chief executive officer Francis Lim, “The REIT law promotes
transparency for tax reporting purposes. Moreover, the new
business opportunities that will be created should translate to a
broader tax base for the government. An independent study
conducted by a team from the University of Asia and the Pacific
concluded that the government will not only recover every peso of
tax incentive but stands to gain between P0.15 and P0.35 more
over a 15-year period. This conclusion was made on the basis of the
March 28, 2009 version of the bill, which granted far more liberal tax
incentives than the enrolled version.”
How can it help improve our economy?
Michael McCullough of Manila brokerage firm,
KMC MAG Group, adds, “The REIT is a promising new
investment option allowing many small investors to take
part in large scale real estate developments through simply
purchasing stocks in the REIT. The entire commercial real
estate industry is excited as REITs will encourage more real
estate development, which will be beneficial to the local
economy.”
REIT Act Requirements for Tax Exemptions
In order to qualify for tax exemptions under the REIT Act, companies
must first meet the following requirements:
Company must be listed in the Philippine Stock Exchange (PSE) and
distribute dividends of at least 90% of its net income;
Company must invest only in real estate or real estate assets;
Company must invest at least 70% of its total assets;
Company must not undertake in property development activities nor invest in
unlisted property development companies;
Company must invest at least 35% of its total assets in real estate
REIT Act Requirements for Tax Exemptions
Not more than 5% of its investments in listed or unlisted debt securities and
listed shares of or issued by property and non-property corporations (local or
foreign) and other locally-registered REIT should be invested in any one
issuer’s securities or any one manager’s funds.
When investing in real estate as a joint owner, the REIT should acquire
shares or interests in an unlisted special purpose vehicle (SPV) constituted to
hold down the real estate and the REIT should have freedom to dispose of
such investment.
Company’s total borrowings and deferred payments should not exceed 35%
of its deposited property.
REIT Act Requirements for Tax Exemptions
A full disclosure on the identity of the parties and the transaction should be
made to the PSE if it acquires assets from or sells assets to interested
parties or invests in securities of or issued by interested parties.
Company must conduct a full valuation of a REIT at least once a year.
Company must comply with the applicable minimum public ownership
requirement of the Philippine SEC.
In addition, to qualify for the exemption of taxes imposed on the transfer or
sale of assets, REIT must retain or hold the assets sold or transferred for a
period of five years from the date of sale or transfer to the REIT.
REIT Act Requirements for Tax Exemptions
REITs must have a minimum paid-up capital of Php
300 million, with 1,000 public shareholders, having at least
50 shares each. Although the act seems promising, it is
important that the incentives and exemptions given to
investors must be offered with caution, as it may impact
other industries, and even government funds.
Past Barriers
• However — despite the incentives provided by the law, the prominent real
estate companies in the country have still been reluctant to establish their
own REITs due to concerns regarding value-added tax and minimum float
requirements.
• The value-added tax levied on the initial transfer of property to REITs
increases the cost of organizing the trust. When an REIT is incorporated, the
parent corporation would most likely transfer several real estate assets to the
trust in exchange for shares of stock. Unfortunately, the 1997 National
Internal Revenue Code (NIRC) of the Philippines treats this transaction as a
sale of ordinary goods, which is subject to the 12% output VAT. This tax is a
major deterrent to real estate firms as the VAT essentially increases the cost
of organizing an REIT.
Past Barriers
• On the other hand, the stringent minimum float requirements remove the
control of the parent corporation over the decision making process of the
trust. Under the current SEC implementing rules and regulations (IRR), the
minimum public float requirement for these companies is set at 40% on the
first year of operations. The limit would then increase to around 67% by the
end of the third fiscal year. This provision is detrimental to the initial parent
corporation as the parent would essentially lose control over the REIT just
after the third year.
• The major real estate companies believe that these negatives offset, or even
outweigh, any benefits provided by RA 9856. Thus — even after 10 long
years, no REIT has yet to be established in the Philippines.
Recent Developments
• The Tax Reform for Acceleration and Inclusion (TRAIN) Act of 2018 provided
a value-added tax exemption for the transfer of ordinary real properties. The
BIR, through its RR 13-2018, further confirmed that this exemption also
applies to the initial transfer of income generating real estate assets by the
parent corporation to the trusts.
• In addition, the House of Representatives of the Philippines issued House
Resolution No. 2057 — urging the SEC to revise the IRR with regard to the
minimum public float requirement of REITs. As a result, the SEC, PSE, DoF,
and other stakeholders have already agreed to reduce the minimum float
requirement to a more reasonable 33%. In exchange, the DoF wants
safeguards to ensure that whatever capital would be raised by an REIT
through its initial public offering (IPO) would only be invested within the
Philippines.
Recent Developments
• The major property companies in the country – such as Megaworld, Double
Dragon, SM Prime Holdings, and Ayala Land – are all looking forward to
these recent developments.
• In fact, Ayala Land Inc. is already planning to establish the first ever Real
Estate Investment Trust in the Philippines. Just this April 24, the company
has filed an REIT registration with the Securities and Exchange Commission.
Once the registration is finalized, Ayala hopes to raise up to $500 Million or
around ₱26 Billion through the trust’s initial public offering. With the first
domino falling, it would not be long before the other real estate companies
follow suit.
Why REITs will be big in 2019
1. New capital for development and regional expansion
2. Job creation
3. Low risk
4. Real-estate innovation and best practices
“Watch out for rise of REITs, investors told”
- June 2019, Philippines News Agency
• “Generally, REITs have outperformed non-REITs and the overall domestic market over the
past one to five years in major Asia Pacific markets”, according to Rick Santos,
Chairman/CEO of Santos Knight Frank’s analysis of REITs in Singapore, Japan, Hong Kong,
and Australia from Thomson Reuters Datastream.
• He estimates the prime and Grade A office market in Metro Manila’s four major central
business districts (Bay Area, Makati, BGC, and Ortigas) at PHP 1.02 trillion.
• REITs are not only limited to office assets. With 4.3 million square meters (gross leasable
area) in Manila’s retail, Santos Knight Frank expects developers to convert mall assets into
REIT companies.
• Assets such as energy, infrastructure, transportation, hospitals, schools, and tourism have
also been converted into REITs in other countries.
