Amended IRR to pave way for REIT takeoff in the Philippines

Colliers sees greater interest in the implementation of the Real Estate Investment Trust (REIT) law following the signing of the amended implementing rules and regulations (IRR) governing REITs in the country.

The law is likely to develop the country’s property and capital markets. In our opinion, the successful launch of REITs in the Philippines bodes well for the property market and the Philippine economy in general as it is likely to attract more foreign investments into the country. REITS should also stoke the construction and infrastructure sectors which have significant multiplier effects to the economy.

The Philippine government enacted the REIT law in 2009 with a stated goal of democratizing wealth and attracting more foreign investment into the property sector. But the launch of REITs was stalled by a number of regulatory roadblocks, including taxation issues and a high public ownership requirement. REITs are now likely to be implemented this year as the government has agreed to relax the law’s restrictive rules.

The Securities and Exchange Commission relaxed minimum public ownership (MPO) requirement to 33 percent from the previous IRR’s requirement of 40 percent. Note that most Asian economies have minimal MPO requirements. Countries such as Japan, Singapore, and Malaysia have MPOs of between 20 percent and 30 percent.

Funds raised from REIT are also mandated to be reinvested in the domestic market.

Full implementation of REITs places the Philippines at par with other Asian economies that have fully developed capital and real estate markets.

Colliers believes that REIT implementation in the Philippines will result in the further differentiation and innovation of property development projects in the Philippines which should eventually benefit Filipino investors and end-users. Overall, a successful REIT launch should take advantage of the government’s ambitious infrastructure development plans as well as the objective of relaxing foreign ownership in crucial economic sectors such as construction and retail.

In our opinion, now is the most opportune time to launch REITs as the Philippine property market has been on an upswing. The Philippines’ office market, for instance, is one of the most active in the region, with about a million sqm being completed every year and an annual take up of more than 900,000 sqm. Metro Manila office lease rates are projected to be among the fastest-growing in Asia from 2020 to 2022.

Colliers believes the property segment’s growth has been anchored on an economy expanding by an average of 6.3 percent a year from 2010 to 2018. The sustained economic growth from 2020 to 2022 should support the expansion of the real estate sector and the attractiveness of a REIT launch.

Aside from traditional asset classes such as office, retail, warehouses, and hotels, Colliers believes that other segments of the economy are likely to benefit from the launch of REITs in the Philippines. With the government being more active in attracting private sector investment, property firms should also explore possible public-private partnership projects that cover hospitals, schools, and toll roads. Colliers believes that developers should be on the lookout for the enactment of the proposed relaxation of foreign ownership cap on construction and retail sectors.