SEC reviews rules to accommodate trading of real estate invest funds

The Securities and Exchange Commission (SEC) will review its existing rules to make way for the eventual trading of real estate investments funds (REIFs) at the local bourse.

Graciano Felizmenio, assistant director of the SEC’s Markets Regulation Department, said they are going to review whether changes should be made with respect to existing rules to accommodate the listing of REIFs. "The more the products, the better for the market," he added.

In preparation for the trading of this new product, the Philippine Stock Exchange (PSE) has drafted the rules and regulations on the listing of REIFs.

The PSE conceptualized the REIF as an investment vehicle formed for the specific purpose of owning, operating or managing developed real estate assets and real estate-related securities.

Under the proposed rules, any REIF applying to list in the exchange must have a minimum asset size of P500 million while a foreign fund should have at least $20 million. Major shareholders are allowed a maximum holding of 75 percent and at least 250 investors must hold a minimum of 25 percent of the total fund’s share capital.

The REIF must be invested in real estate and must make up at least 70 percent of the total assets under management.

The PSE also proposed that at least 50 percent of total assets must be income producing and not likely to be sold within a year.

A portion of the income generated from the assets will be distributed to REIF investors in the form of a dividend, which will be taxed at lower rates than ordinary income. Investors will also receive investment certificates that will be tradeable through the PSE.

The PSE is also seeking the passage of a law that will give special fiscal incentives to those who will invest in REIFs.

The PSE said the REIFs’ listing rules proposed by the exchange lack the fiscal incentives found in other exchanges’ real estate investment trusts rules. Nevertheless, the introduction is envisioned to serve as the foundation for the passage of an enabling law by Congress.

Pending the legislation of an enabling act, the REIF as a close-ended mutual fund shall be regulated under the provisions of the Investment Company Act.

Apart from the REIFs, the PSE is also considering the possible listing of exhange traded funds (ETFs) in line with efforts to broaden the products available to the investing public.

ETFs are open-ended funds which track indexes or sectoral basket of securities that are listed and traded on a stock exchange. Investors may diversify their portfolios by investing in a single unit of ETF which conveys ownership in a group of securities representing specific industries or market sectors.

Because ETFs are exchange-traded, they are continually priced and can be traded intra-day. They enable investors to easily rebalance their portfolio at a low cost or to take advantage of a market trend.

Similar to stocks, ETFs can be bought or sold in the board subject to modest management fees, regular stock transaction taxes and expenses.

ETFs are designed to generally correspond to the price and yield performance of their underlying indexes, either broad stockmarket or stock industry sector.

Sun Life Asset Management Company Inc., a subsidiary of listed insurance giant Sun Life of Canada, has already signified its intention to list its ETFs in the exchange. This will be coursed through the trading participants initially as distributors of mutual funds and ultimately as traders upon listing with the exchange.

At present, the PSE deals only in a limited number of securities which include common stocks, preferred stocks, warrants, depository receipts, the small-denominated treasury bonds and treasury bills.