The Securities and Exchange Commission (SEC) has committed to develop real estate investment trusts (REITs) into a viable new asset class this 2019 by finalizing a framework ensuring that proceeds would remain in the country.
In an interview on Friday night, SEC Chair Emilio Aquino said the corporate watchdog wanted to make sure that proceeds raised from the public offering of REITs would benefit the domestic economy.
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 even infrastructure ventures like toll roads and powerplants—other than the property developer. This was meant to attract investors because the Philippine REIT law of 2009 required the distribution of 90 percent of income annually.
Since 90 percent of earnings are paid out as dividends, Aquino said it was imperative that the money would remain in the Philippines through a “lock-up” provision.
Keeping the REIT proceeds onshore has been a key concern of Finance Secretary Carlos Dominguez III.
“We’re working towards a framework to address the concerns raised by the Secretary,” Commissioner Ephyro Luis Amatong said in a separate interview. “The capital that’s recycled by floating securities with the REIT vehicle will be invested in the Philippines.”
The SEC had completed an internal study in 2016 that supported the lowering of the REIT minimum public ownership (MPO) requirement to 33 percent, which was what the REIT law provided. Addressing the lock-up requirement, however, is the SEC’s condition before lowering the MPO on REITs, currently set at 40 percent in year one and which will further go up to 67 percent by year three.
Amatong said he was confident that REITs could finally take off this year “as long as there are no other tax issues,” he said.
The issue on the value added tax (VAT) on REITs has already been addressed by the Tax Reform for Acceleration and Inclusion Act, which took effect last year. The first infusion of assets into the REIT vehicle is not subject to VAT.
Yet, there is still an existing revenue regulation order from the Bureau of Internal Revenue requiring compliance with the 66-percent public ownership and with the proceeds put in escrow until the requirement is met. Otherwise, the REIT transaction will be subject to tax.
“There needs to be movement on that also,” Amatong said.
In its current form, the mandatory sell-down by the REIT sponsor to attain such 66-percent public ownership is not acceptable to the capital market. This is especially because public ownership requirements across the region were much lower: 20 percent in Japan, 25 percent in Singapore, Australia and Hong Kong, and 30 percent in Malaysia.