REIT in the Philippines
What is REIT?
In a nutshell, REIT means Real Estate Investment Trust. It is known as a key consideration in the construction of any equity or fixed-income portfolio. REITs have higher total returns and lower risk factors. One may say that REIT has the ability to create dividend income along with appreciation in capital which can help in balancing stocks, bonds, and cash.
REITs own and/or manage commercial real estate that produce income, whether these properties are for sale or mortgages only. Individuals can invest in companies by themselves, may it be through an exchange-traded fund or mutual fund.
REIT first started in 1960 under the rule of US President Dwight Eisenhower. In comparison, the first formal Stock Exchange was established in Amsterdam in 1602. In the Philippines, only in September 2009 that The House of Representatives and Senate respectively approved the REIT Act. However, REIT was not fairly accepted by the big players in the real estate industry. They found public ownership level prescribed and application of the 12% value-added (VAT) tax on the transfer of properties to REITs unacceptable. However, during this regime of Duterte, the Department of Finance (DOF) supported the easing of the restrictive ownership and taxation requirements.
A REIT does not have the same technical meaning as “trust” under existing laws and regulations. The term is utilized in the REIT Act for the sole reason of taking on the universally acknowledged portrayal of the organization as per worldwide accepted procedures.
Types of REIT
Most REITs are Equity REITs, which possess and oversee real estate. Incomes are produced fundamentally through rents (not by exchanging properties).
Mortgages REITs loan cash to land proprietors and administrators either straightforwardly through home loans and advances, or in a roundabout way through the obtaining of home loan supported protections. Their income are created principally by the net revenue edge—the spread between the premium they acquire on contract credits and the expense of subsidizing these advances. This model makes them possibly delicate to loan cost increments.
These REITs utilize the venture systems of both Equity and Mortgage REITs.
Benefits of Investing in REIT
Any individual can ensure that the same rules on major stock exchanges are applied. Hence, listed securities were shown publicly for regulatory and reporting purposes.
This is another key feature of REITs. They can be easily sold and bought once opened or closed in the market.
REITs have stable income. You are assured to have 90% or more of the profits to be returned on you.
This type of investment is different from others. When other stocks or securities are down, REITs are sure to be not affected by it as it has low correlation to other assets.
This has a steady long-term appreciation to commercial properties.
1. Slow Growth
Since 90% profit was given back, only 10% can be reinvested back into the business.
2. Tax and Management Fees
Unlike usual dividends with the 15% rule, REITs dividends are taxed the same as regular income. Management fees could also lessen.
3. Low Control
Most investors will not be able to have full control on their assets. Investors won’t have a say on operational decisions, such as the ownership of properties and the strategies applied to market trading.
Note: Though the Philippine REITs have its disadvantages, it also has its merits. These minimal disadvantages should not stop anyone from investing in good assets.
How To Invest?
Investment in REIT shall be by way of subscription to or purchase of shares of stock of the REIT. Hence, anyone can do this investment.
Like any other investment, there are expenses included. These are generally made out of REIT chief expenses and property director charges.
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
REIT Fund Manager
Carries out the speculation procedures of the REIT by deciding the portion of the stored property to the reasonable venture outlets and choosing income generating land
Manages and facilitates property securing, renting, working and monetary detailing, evaluations, reviews, market survey, bookkeeping and detailing methodology, and renegotiating and resource demeanor plans
Causes a valuation of any of the land and different properties of the REIT to be done by the property valuer.
REIT Property Manager
Responsible in planning the tenant list and potential tenants
Plans and implements leasing strategies that are most effective
Enforces the tenancy conditions
Makes sure that all government regulations set under the law were followed
Responsible in providing all the requirements needed for the routine management such as security control, fire precautions, communication systems and emergency management
Leads in maintaining and managing the properties
Has the power to make and implement programs and policies that will be helpful in the maintenance and improvement of building management
Protections Given to Investors:
The REIT Act, together with its IRR, has rules on minimum public ownership, conflict of interest, related party transaction, limitations on compensation and fees paid by a REIT, restrictions on investment activity of a REIT, fit and proper rule and rules on oversight of independent directors.
For instance, one of the amendments to the REIT IRR requires the creation of a related party transactions committee. Majority of the committee members must be independent directors who shall vote unanimously in approving related party transactions.
The REIT will also have to comply with SEC Memorandum Circular No. 10, Series of 2019, which provides the Rules on Material Related Party Transactions for Publicly-Listed Companies. SEC Memorandum Circular No. 10, Series of 2019 requires publicly listed companies to disclose their respective policies on material related party transactions and report such dealings within three days from their execution, among others.
As a listed company, the REIT will also be subject to the stringent rules of SEC and the Disclosure Rules of PSE. Sanctions are in place for violations of the applicable laws, rules and regulations.
With those who are still undecided on which they should invest, REIT may be your solution. There are many possible REIT investments you can choose from- Ayala, Double Dragon, Federal Land, and Megaworld. In our next blogs, we will discuss different REITs in the Philippines.