An 11-year-old law allowing Filipinos to invest in real estate assets via a financial instrument while providing property developers a cheaper source of capital is expected to finally take off with the signing of the amended rules and regulations.
Finance Secretary Carlos G. Dominguez III said the implementation of the 11-year-old REIT law under the amended implementing rules and regulations (IRR) will ensure that whatever fresh capital will be raised via the Real Estate Investment Trust (REIT) will be reinvested exclusively in the country.
The new IRR also ensures that small investors such as middle-class families and overseas Filipino workers (OFWs) are protected, he added.
“Today, we bring the law to life,” Dominguez said during the signing ceremony on January 20, 2020. “We finally resolved the issues that hindered the Philippine REIT to take off.”
Republic Act (RA) No. 9856, or the REIT law, enables the creation of stock corporations that purchase, develop and operate income-generating real estate assets.
Filipinos with extra income can then invest or participate in the thriving real property business by buying shares in REITs instead of buying real estate assets themselves.
Dominguez signed the new IRR together with Securities and Exchange Commission (SEC) chairman Emilio Aquino, Bureau of Internal Revenue (BIR) Commissioner Caesar Dulay and Philippine Stock Exchange (PSE) president-CEO Ramon Monzon.
“Today, we deliver to our economy a powerful financial instrument to fund property development and drive the economy forward. We democratize wealth by opening access for thousands of small investors wanting to be shareholders in secure and profitable real estate projects,” Dominguez said during the ceremony.
Other relevant documents on the REIT law that were also signed were the BIR Revenue Regulations on the REIT and the amended Listing Rules for the REIT of the PSE.
Real estate company Colliers International Philippines said the signing of these new rules is expected to stoke the construction and infrastructure sectors in the country, and attract more foreign investments.
“In our opinion, now is the most opportune time to launch REITs as the Philippine property market has been on an upswing. The Philippines’ office market, for instance, is one of the most active in the region, with about a million sq metres being completed every year and an annual take up of more than 900,000 sq metres. The Metro Manila office lease rates are also projected to be among the fastest growing in Asia from 2020 to 2022,” the company said in a statement.
To best take advantage of REITs, Colliers recommends that developers also undertake the following:
• Consider divesting their properties into REITs to access a cheaper source of capital
• Use REIT proceeds to renovate and reposition assets such as offices, malls, and warehouses
• Use REIT funds to develop integrated communities in key cities outside Manila
• Set aside a portion of REIT proceeds to acquire reclaimed properties in Manila
• Use REITs as a benchmark for valuing assets
• Acquire co-living and co-working facilities that could eventually be diversified into a REIT.
Among the property developers that have expressed interest in REITs are Ayala Land, Inc., DoubleDragon Properties Corporation, Megaworld Corporation, Robinsons Land Corporation and Century Properties Group, Inc.
New rules
The law was signed 11 years ago and its rules issued subsequently, but investor response was tepid because of contentious provisions.
On top of requiring the reinvestment in the domestic market of funds raised from REIT, the new IRR also relaxed the minimum public ownership (MPO) requirement to 33%, as provided by law, from the previous IRR’s requirement of 40 percent.
“This will open up attractive investment opportunities and broaden access to the capital market. This will allow big players in the real estate business to raise more capital to further invest in our country, a win-win situation for all,” Dominguez said.
The law specifies both minimum dividend requirements to attract small investors as well as tax incentives that may have turned off investors in the past, Dominguez said.
“We took on the challenge but had to be sure that the tax incentives would not be prone to abuse. We had to be very clear in our revenue regulations. This is why we needed to recast the existing revenue guidelines,” Dominguez said.
“We likewise wanted to be sure that the large investment funds to be raised using this mechanism will be reinvested exclusively within the country’s real estate and infrastructure sector. The reinvestment requirement is the regulatory framework, which ensures that the funds invested by Filipinos will stay in our domestic economy and will contribute to the improvement of our country’s infrastructure, rather than the benefits being squirreled away to other markets and countries,” he added.
Aside from traditional asset classes such as office, retail, warehouses, and hotels, Colliers said other segments of the economy are likely to benefit from the launch of REITs in the Philippines.
Property firms should also explore possible public-private partnership (PPP) projects that cover hospitals, schools, and toll roads.
Colliers also said developers should be on the lookout for the enactment of the proposed relaxation of foreign ownership cap on construction and retail sectors.
“In our opinion, easing of foreign ownership restrictions in these sectors should contribute to a more attractive REIT industry in the Philippines moving forward,” the company added (Ventures Cebu)
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