SEC wants minimum float on REITs slashed

The Securities and Exchange Commission (SEC) has backed a proposal to ease the minimum public float on real estate investment trusts (REITs) to allow this new asset class to finally take off seven years after the enabling law was passed in Congress.

“We already finished the study. We propose a lower minimum public ownership requirement of 33 percent. It’s what the law provides,” SEC Chair Teresita Herbosa told reporters Tuesday at the sidelines of the Lathan & Walkins conference on the Philippines. “And, maybe, we just reserve right to revisit it when market conditions are OK.”

Changes in the REIT framework might be finalized within the quarter, she said.

THE SEC and the Bureau of Internal Revenue were tasked to review the implementing rules and regulations governing the Philippine REIT Law of 2009.

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

During the Aquino administration, the REIT did not take off due to regulations that were even more stringent than what the law prescribed.  The high public float requirement was among the constraints often cited by investors.

An initial 40-percent minimum public ownership was required during the first three years of a REIT’s operation.  This was acceptable to the private sector but the increase to 67 percent by the third year—which would require a significant mandatory sell-down by the REIT sponsor—was not deemed unacceptable. REIT ownership requirements across the region were much lower: 10 percent in Singapore and 25 percent in Australia, Hong Kong and Malaysia.

On the taxation issues, Herbosa said the government would have to balance the regulations.

The private sector has criticized the imposition of the 12-percent value-added tax (VAT) on initial asset transfers, which is 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 are not subject to VAT under certain conditions.  The Bureau of Internal Revenue (BIR), however, issued a revenue regulation which imposed a 12-percent VAT on such transfers.

Another REIT regulation that has been disconcerting to investors is the requirement that tax savings arising from fiscal incentives be put in escrow, which would be taken back by the government if and when the REIT falls below the required public ownership and gets delisted.

In his presentation Tuesday, Philippine Stock Exchange president Hans Sicat said industry market participants were pushing to revert to the original set of implementing rules and regulations which they believed to be “more workable.”