The Philippines hopes to finally launch real estate investment trust (REIT) as a new asset class this 2020, allowing property developers to recycle capital after more than a decade since an enabling law was passed.
“The REIT framework has been coordinated with the DOF (Department of Finance). We are on track to launch in the new year,” Securities and Exchange Commission (SEC) commissioner Ephyro Luis Amatong told the Inquirer.
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 itself. This is meant to attract investors because the Philippine REIT law of 2009 required the distribution of 90 percent of income annually.
Asked what else was needed, Amatong said the DOF and the Bangko Sentral ng Pilipinas had given their comments as required by law while the Philippine Stock Exchange (PSE) had submitted amendments to the rules on listing real estate.
“We are finalizing the IRR (implementing rules and regulations) revisions. I understand that [the Bureau of Internal Revenue] is also working on revisions to their revenue regulations,” Amatong said.
To allay regulators’ concerns that money raised from a domestic offering would be invested overseas instead of funding local property projects, the PSE has proposed that the REIT rules be amended to require all REITs to invest at least 75 percent of deposited property to income-generating real estate, with a caveat that it would not invest in real estate located outside the Philippines.
To be able to invest outside the Philippines, the REIT must seek special authority from the SEC.
More than 10 years since the legislation of the REIT law, this asset class did not take off because of issues on the value-added tax (VAT) and the minimum public ownership (MPO) requirement. The Tax Reform for Acceleration and Inclusion Act enacted at the end of 2017 resolved the VAT issue with its provision that the REIT was not subject to VAT.
On the MPO, the SEC had earlier set the requirement at 40 percent during year one, further rising to 67 percent on the third year. This was, however, not acceptable to prospective REIT proponents. The DOF agreed to ease the MPO requirement for as long as the PSE and the SEC could ensure that funds raised using a REIT listing would remain onshore.
Citing the policy to develop the local real estate investment industry, the PSE plans to require sponsors of the REIT to reinvest in the Philippines any proceeds received from any secondary offering of shares within a period of five years. However, the PSE may grant a longer period of reinvestment if justified by the nature and magnitude of the project involved. An extension may also be granted in case of force majeure.