The Securities and Exchange Commission is expected to finally ease the minimum public float on real estate investment trusts (REITs), one of the reforms needed for this new asset class to take off nearly a decade after the enabling law was passed.
In a recent meeting with the Capital Markets Development Council (CMDC), SEC Chair Teresita Herbosa vowed to revisit the REIT minimum public ownership requirement.
Herbosa said SEC’s move would be subject to confirmation that the value added tax issue had been resolved under the tax reform package 1. “If such issue is resolved in favor of the REIT by BIR and/or legislation, the SEC will amend its existing rule on public flaot for REITs to align with the minimum prescribed by law which is 33 percent,” she said.
“Based on the pronouncement, SEC is willing to go down to what the law provides, which is 33 percent,” ACCRALaw senior partner Francis Lim, a member of CMDC, said in a recent interview.
Lim said the easing of such requirement—currently set at 40 percent on year 1 and rising to 67 percent to year 3—would be a big boost to REITs.
Ephyro Amatong, Commissioner at the SEC, said the SEC had indeed indicated willingness to reduce the minimum public float on REITs.
“But there’s nothing official yet,” he said. Asked about the possible timing of the reduction in public float requirement, Amatong said: “There will be internal discussions.”
As early as 2016, the SEC had completed an internal study that supported the lowering of the REIT minimum public ownership requirement to 33 percent, which was what the REIT law provides.
REIT proponents have long been saying that while the initial 40 percent minimum public ownership rule applicable during the first three years of a REIT’s operation is 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—is generally not acceptable. This is especially because comparable public ownership requirements across the region were much lower: 20 percent in Japan, 25 percent in Singapore, Australia, Hong Kong and 30 percent in Malaysia.
The Philippine Congress passed in 2009 an enabling law to encourage the creation of REITs, instruments that give investors the option to invest directly in the finished products that are already earning money and not just the property developer.
Another issue hindering the launch of REITs is the tax treatment. The Bureau of Internal Revenue’s earlier interpretation was that while initial transfer of assets into the REIT would be free from taxes on gains, the 12 percent value added tax (VAT) will be imposed on the income-generating property from the sponsor to the REIT.