Rules on real estate investment trusts to be signed by yearend

MANILA, Philippines - A law that will provide the regulatory framework for real estate investment trusts (REITS) is expected to be signed by the end of the year, allowing the Philippines to take a significant step in recognizing the importance of real estate as an alternative investment instrument.

During the REIT Asia Pacific Philippines 2009 Forum yesterday, Philippine Stock Exchange president Francis Lim said the REITS, which are widely adopted in the United States, Australia and other markets in the region, will provide new investment opportunities for the public and reinvigorate the local capital market.

REITS are companies that own and operate income-producing real estate which are granted tax exemptions by the government but are required to pay out a substantial part of their net taxable income as dividends to shareholders.

Lim said the global REITS industry has grown significantly with its market capitalization now amounting to $450 billion, $56 billion of which is from Asia.

“With the right legislation and property companies throwing in their crown jewels, there’s no doubt that REITS would be a success in the Philippines,” the PSE chief said.

On Sept. 22, the Congressional bicameral conference committee approved the REIT Act of 2009, sending the consolidated bill to the House of Representatives and the Senate for third and final reading. Once approved, the bill will be submitted to President Arroyo for signing into law.

Within 90 days from the passage of the bill, the Securities and Exchange Commission together with the Bangko Sentral ng Pilipinas, Department of Finance, PSE, and players in the real estate industry will draft the implementing rules and regulations of the REIT Act of 2009, Lim said.

He said REITs enable small investors to invest in large-scale real estate ventures, through stock purchases, that would otherwise be reserved for bigger investors. Investors no longer need to go through the traditional method of directly buying and selling real estate properties themselves and dealing with the administrative and commercial problems.

Among the income-generating assets that can be converted into REITS include office buildings, residential condominiums, townhouses, apartments, shopping centers/outlet centers, tourism-related facilities (hotels, resort facilities, restaurants, golf courses); healthcare (hospitals, nursing homes, retirement homes, drugstores); industrial (warehouses, R&D centers), and infrastructure (expressways, railways, ports, power plants).

Under the proposed REIT Act of 2009, the REIT must be a public company with a paid-up capital of P300 million and at least 1,000 public shareholders each owning at least 50 shares of any class and who in the aggregate own at least one-third of the outstanding capital stock of the REIT. 

The REIT must distribute annually at least 90 percent of its distributable income which is net income as adjusted for unrealized gains and losses/expenses, impairment losses and other items and excludes proceeds from the sale of assets that are reinvested in the REIT within one year from disposition.

At least 75 percent of deposited property of the REIT must be invested into or consist of income-generating real estate. 

Robinsons Land Corp. president Frederick Go said while the company is interested in this new investment instrument, timing would be a crucial factor in the introduction of REITS. “We’re waiting for the IRR. Most companies would probably want to take advantage of the benefits that the REITS could give but this would depend on market conditions,” he said.

For his part, Ayala Land Inc. chief finance officer Jaime Ysmael said the REITs can provide companies the opportunity to free up capital that can be invested in other profitable businesses.

A REIT portfolio already provides significant investment diversification as it may include different kinds of properties in various locations including investment in overseas markets.

Japan pioneered the introduction of REITs in Asia in 2001, shortly followed by South Korea in the same year. In 2002, Singapore enacted its REITs legislation, followed by Hong Kong and Taiwan the following year. Both Malaysia and Thailand also have their version of REITs which were established in 2003.