REIT here, right now

The Philippine government enacted the Real Estate Investment Trust (REIT) law in 2009 with a stated goal of “democratizing wealth” and attracting more foreign investment into the property sector.

According to the Securities and Exchange Commission (SEC), “REITs allow Filipinos to invest in the real estate market without owning actual property or the disadvantages of high transaction costs and illiquidity.” The Philippine government enacted the measure to develop the country’s capital market, broaden developers’ fundraising options, further unlock the value of real estate firms’ properties and expand developers’ leasable portfolio.

A study commissioned by the Asia Pacific Real Estate Association (APREA) noted that REITs help improve Asian economies as they attract foreign capital into the property sector, unlock capital and generate additional jobs for the local economy in allied industries such as asset management, investment appraisal, investment banking, development management and construction. The report further noted that REIT proceeds are often used to refurbish and reposition real estate properties, resulting in an improved environment for both developers and tenants.

The road to REIT implementation, however, was initially bumpy. The launch of REIT in the Philippines was delayed by a number of regulatory roadblocks, including taxation issues and a high public ownership requirement. In 2019, the government finally relaxed some of the law’s contentious provisions.

Colliers believes that 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 sector which has significant multiplier effects to the economy. In our view, this is one segment likely to support the country’s economic growth beyond the pandemic.

The REIT launch also places the Philippines at par with other Asian economies that have fully developed capital and real estate markets. Colliers believes that the continued implementation of REIT in the Philippines will result in the further differentiation and innovation of property development projects which should eventually benefit Filipino investors and end-users.

Diversification into logistics

Colliers believes that property developers need to upgrade their warehouses continuously to keep up with the needs of logistics tenants. In our view, logistics facilities would be an attractive REIT asset class as the industrial sector has shown relative stability despite uncertainties in the Philippine economy. Warehouses are also in demand due to the emergence of a lockdown economy and the growth of e-commerce in the Philippines.

One of our recommendations for developers is to accelerate the modernization of warehouses across the country to capture thriving demand in the sector. This should be supported by the Philippines’ improving global logistics ranking and infrastructure backbone.

Use REITs in valuing assets

The Philippine property market is quite opaque as actual market information is not readily available. The disclosure of values through REIT transactions, however, should enhance transparency in the property sector moving forward, benefiting all market participants. Our valuation and advisory teams, led by Paul Ramirez and Tim Teodoro, have been active in assisting developers with their REIT requirements. The queries they receive indicate developers’ interest in tapping the domestic REIT market.

Source of funds for mid-sized developers

In our view, developers should consider priming assets for REIT listing. This is particularly important for mid-tier developers that intend to raise funds by selling assets to major developers in the future.

Integrated communities outside MM

Colliers believes that national developers should use REIT proceeds to develop integrated communities in key cities outside Metro Manila. Among the more attractive locations are Metro Clark in Pampanga, Iloilo, Cebu, Bacolod, and Davao. This should support national developers’ goal of expanding their market-wide footprints outside of Metro Manila beyond the pandemic.

Opportunities outside traditional REIT assets

Colliers believes that property developers and other industry stakeholders should watch for the relaxation of foreign ownership cap in certain sectors such as construction. Easing of foreign ownership restrictions in these economic segments should contribute to a more attractive and dynamic REIT environment moving forward.

In our view, REITs are viable investment options during and beyond the COVID-19 pandemic. It will benefit both developers and investors.

For more information on REITs, please visit: philippinereit.colliers.com or e-mail: [email protected]