Gov’t asked to revoke restrictive REIT rules

The Philippine Stock Exchange is asking the Duterte administration to scrap restrictive administrative and revenue regulation orders that have prevented the take-off of real estate investment trusts (REITs) in the country long after an enabling legislation was passed in 2009.

In a briefing on Monday, PSE president Hans Sicat said the fastest way to create a REIT market in the country would be to revoke the orders which provided the implementing rules and regulations (IRR) of the Philippine REIT law. The said orders imposed heavy taxes on the infusion of assets into the REIT.

REIT gives investors the option to invest directly in finished products that are already earning money—such as residential and office units, hotels or shopping malls or infrastructure ventures like toll roads and power plants—and not just in the property developer.  This was meant to attract investors because the REIT law of 2009 requires the distribution of 90 percent of income yearly.

The tax burden referred to by Sicat included the imposition of a 12-percent value added tax (VAT) on the initial asset transfers, which was expected to translate to significant upfront costs.  In previous years, such property transfers to a company in exchange for shares of stock in that company were not subject to VAT. The Bureau of Internal Revenue (BIR), however, issued a revenue regulation that imposes a 12-percent VAT on such transfers.

Apart from scrapping such BIR revenue regulation, the PSE also proposes to take out a rule requiring a multi-year increase in public float of REITs beyond the 33 percent minimum requirement prescribed by the original IRR.

REIT proponents have long been saying that while the initial 40 percent minimum public ownership (MPO) rule applicable in the first three years of a REIT’s operation was acceptable to the private sector, the increase to 67 percent by the third year—which would require a significant mandatory sell-down by the REIT sponsor—was not.

MPO requirements across the region were much lower: 10 percent in Singapore and 25 percent in Australia, Hong Kong and Malaysia.

Once these issues are addressed, Sicat said “we know that the products will work immediately,” adding that the REIT market would be a “low-hanging fruit.”

Sicat said the original IRRs were “workable” but the subsequent regulations—such as those issued by the BIR—had prevented the local capital market from developing the REIT as a new asset class.