New business opportunity

Following an announcement by leading property developer Ayala Land Inc. (ALI) that it plans to raise funds through real estate investment trusts or REITs, other real estate companies seem to have taken notice.

A REIT is a special type of publicly listed company that own and operate properties that generates a steady stream of income through income-generating real estate assets, like condominiums, resorts, offices, hotels, malls, or apartment buildings. They can also own and operate infrastructure facilities like airports and tollways.

In 2009, Republic Act 9856 or the REIT Act lapsed into law. To attract potential investors, the law provides for certain incentives for qualified registrants. For instance, while a Philippine REIT is subject to regular income tax, it can claim as deduction from its taxable net income any dividend distributed out of its distributable income. Under the law, REITs are required to distribute annually at least 90 percent of their distributable income as dividends.

In order to qualify for these incentives though, the law requires for a REIT to be a public company as well as a listed company, it must have a minimum paid-up capital of P300 million with at least 70 percent of its assets invested in or must consist of income-generating real estate, at least one-third of its board of directors must be independent directors.

Unfortunately, 10 years after RA 9856 came into being, the local capital market has found it hard to attract a REIT listing. This is because property developers oppose taxation and public ownership rules that require them to relinquish their control over their REIT company.

A study published in the NTRC Tax Research Journal and prepared by the DOF’s Jayson Lopez noted that there are three requirements that delay the full implementation of the REIT Law. First is the minimum public ownership requirement (public shareholders must own at least 1/3 of the outstanding capital stock of the REIT upon and after listing compared to the 10 percent MPO for other publicly listed companies; the Securities and Exchange Commission, however, amended the REIT IRR so that the 67 percent minimum public ownership will only be required three years after public listing).

Second is the imposition of VAT on the initial transfer of property from the initial owner of the real property to the Philippine REIT in exchange for the latter’s shares of stocks, and third is the escrow requirement on income tax collectible from the company (while the law allows dividends to be claimed as deduction from taxable net income, the REIT must first place in escrow in favor of the BIR the income tax collectible on the dividend declared and such will be released to the REIT only upon showing that it had complied with the increase of minimum public ownership to 67 percent within three years from listing).

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 BIR has confirmed that the initial transfer of real property to REITs are indeed exempt from VAT.

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.

And while all these discussions are happening, ALI announced plans to raise P26 billion, or around $500 million, through REITs. It 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.

There have also been 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.

Recently, global real estate services company Colliers International said that it 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.

But in a more recent report, Colliers noted that REITs are likely to be implemented this year as the government has agreed to relax the law’s restrictive rules, as it pointed out that most Asian economies have minimal minimum public ownership (MPO) requirements. Countries such as Japan, Singapore and Malaysia have MPOs of between 20 and 30 percent, it said.

In its report, Colliers said that the full implementation of REITs places the Philippines at par with other Asian economies that have fully developed capital and real estate markets, adding that REIT implementation in the Philippines will result in the further differentiation and innovation of property development projects in the country which should eventually benefit Filipino investors and end-users.

Overall, a successful REIT launch should take advantage of the government’s ambitious infrastructure development plans as well as the objective of relaxing foreign ownership in crucial economic sectors such as construction are retail, it said. 

Colliers suggested that now is the most opportune time to launch REITs as the Philippine property market has been on an upswing.

 Aside from traditional asset classes such as office, retail, warehouses and hotels, Colliers believes that other segments of the economy are likely to benefit from the launch of REITs in the Philippines. For instance, property firms should also explore possible public-private partnership (PPP) projects that cover hospitals, schools and toll roads.

In the report, Colliers added that the proposed easing of foreign ownership restrictions in the construction and retail sectors should contribute to a more attractive REIT industry in the Philippines moving forward. 

In another study, Collier said that over the next three years, hotel REITs will be an attractive option for developers given the sustained demand from the traditional sources such as Koreans, Chinese, Japanese and Americans. The growing number of foreign tourists should be supported by rising demand for meetings, incentives, conventions and exhibition (MICE) facilities due to local and international events as well as a continued push for more domestic travel, driven by the popularity of the staycation concept in Metro Manila, it added.

It also noted that REIT proceeds can be used by developers to either acquire international brands or build homegrown brands.

The report pointed out that over the past three years, national players such as Ayala Land, Megaworld, Rockwell and Filinvest being more aggressive in launching their own hotel brands such as Seda, Savoy, Aruga and Quest while local developers, especially those based in Cebu, have been active in bringing in international brands. These include Cebu Landmasters with the first Radisson Red in the country, AppleOne Properties’ Resorts Worldwide, Sheraton and Starwood Hotels in Mactan, and Grand Land’s Dusit Hotel. 

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