REITS are here

Ten years after a law was passed allowing them, real estate investment trusts or REITs are finally taking off.

Property developer Ayala Land Inc. (ALI) had announced plans to raise P26 billion, or around $500 million, through REITs. According to Ayala officials, they will start with a few assets only, primarily those in the Makati central business district and basically office assets.

ALI president Bernard Vincent Dy said that their REIT firm could be used to acquire office assets in the Makati CBD. ALI plans to sell to the public 67 percent of the REIT company and will hire sister firm BPI as underwriter for the offering which is scheduled this year.

Being one of the country’s largest and most trusted property developers, ALI’s move will give REITs a nice push.

A REIT is a special type of publicly listed company that owns properties that generates a steady stream of income through income-generating real estate assets, like in the case of ALI, offices. In some cases, this can be hotels, malls, or apartment buildings. Under RA 9856 or the REIT Law, local REITs are required to declare and distribute 90 percent of earnings as dividends. REITs, meanwhile, are allowed to claim the dividends as a deductible expense for income tax purposes.

The local capital market has found it hard to attract a REIT listing since the REIT Law was passed in 2019. This is because property developers oppose taxation and public ownership rules that require them to relinquish their control over their REIT company.

But recent developments have been favorable for REITs. Under the TRAIN Act of 2018, the tax on transfer of properties into a REIT vehicle has been removed. The Bureau of Internal Revenue has confirmed that the initial transfer of real property to REITs are indeed exempt from the value-added tax .

Developers, however, are still pushing to relax the 67 percent public float which a REIT must meet within three years. Under current SEC rules, the minimum public float is set at 40 percent on the first year of operations, increasing to 67 percent by the end of the third fiscal year. However, there are ongoing discussions between the Securities and Exchange Commission (SEC) and the Department of Finance to lower this to 33 percent.

There were reports that Double Dragon Properties Corp. is anchoring its next stage of growth on the hospitality and industrial sectors in preparation for a REIT offering.

Global real estate services company Colliers International sees office-led REIT gaining traction over the next 12 to 18 months following ALI’s plan to raise funds by listing its Makati CBD office buildings through REIT.

It expects that office REITs will benefit developers as they continuously capture the sustained office space demand from offshore gaming, multinational, and outsourcing companies, adding that implementing REITs is an opportunity for office developers to expand footprint outside of the country’s capital in light of the national government’s order to halt the processing of economic zone applications in Metro Manila.

Tenants should also benefit from the refurbishment of office buildings using REIT proceeds, Colliers said.

In a report, Colliers noted that over the past five years, office rents have been growing at an average of about seven percent, making office buildings an attractive asset class to list under REIT.  It said that the strong absorption of office space recorded in Metro Manila in 2018 where 1.18 million square meters was taken up is likely to be sustained moving forward as emerging office occupants such as local and international flexible workspace operators, as well as financial technology (fintech) companies, are starting to take up significant office space.

The growing office space absorption, it added, should be supported by the government’s infrastructure push with its Build Build Build program giving developers impetus to build more office space to respond to construction and engineering firms’ growing office space requirements.

From 2019 to 2021, Colliers projects an annual vacancy of 6.3 percent given an annual completion forecast of 1.08 million square meters and projected yearly net absorption of 958,000 square meters. The additional supply should be tempered by an active leasing market, it said.

Colliers said developers could use REIT proceeds to expand their presence in key cities outside Metro Manila such as Cebu, Bacolod, Iloilo, Davao, Cavite, and Clark in Pampanga, following government’s latest order directing the Philippine Economic Zone Authority (PEZA) to halt the processing of applications for ecozones in Metro Manila. This, it pointed out, is crucial in creating more robust economic activities outside country’s capital and should offset any decline in outsourcing and technology-related investments in Metro Manila.   

The report also expects developers to be aggressive in their office developments especially in Pampanga and Cavite with the ongoing redevelopments of Clark and Sangley airports. Colliers said improved connectivity from Manila to Pampanga and Cavite should make these locations highly viable for outsourcing operations and that the modernized airports and railways should raise Pampanga and Cavite’s competitiveness as alternative outsourcing locations outside Manila.

Colliers also emphasized that implementing REIT is an opportunity to expand leasable office space outside of Metro Manila said that developers should use the REIT framework to develop more office towers in other urban areas.

Another development that bodes well for REITs is a recent move by the Insurance Commission to allow all insurance and reinsurance companies, pre-need firms, and mutual benefit associations to invest in REITs which shall qualify as admitted assets.

Under the IC circular issued last month, only publicly listed REITs can be treated as admitted assets. Investments by a life insurer or an MBA in REITs should not exceed 10 percent of their total admitted assets, while that for a non-life insurance firm or professional reinsurance company should not be more than 20 percent of their net worth. For pre-need companies, the maximum investment amount in REITs is 15 percent of their total trust fund.

Insurance Commission chief Dennis Funa said no local REIT has been incorporated or established, even as RA 9856 lapsed into law a decade ago since market players claim that legal and administrative requirements have made investment in the domestic REIT market difficult. But taking into consideration the much-anticipated amendments to the implementing rules of the REIT Law by the SEC and the Build Build Build infrastructure program, the circular is very timely to ensure that insurers and pre-need industry players are well-prepared.

Funa added that the new regulation would allow insurance and pre-need companies to hit the ground running as early as the first listing of a Philippine REIT.

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