Fast facts about REIT
REIT investors should be aware of trends and current situations which might affect leasing and not necessarily property values.
A Real Estate Investment Trust (REIT) is a corporation that:
• is listed on a public stock exchange with at least 33 percent of its outstanding shares owned by the investing public;
• must invest 75 percent of its total assets in income-generating real property;
• must distribute 90 percent of its unretained earnings to its shareholders; and
• must have a minimum paid-up capital of P300 million.
The REIT was devised as a way for the general public to invest in large scale, income-producing real estate.
How REIT started
The REIT was created in 1960 in the United States as a way for the general public to invest in large scale, income-producing real estate.
Investing in PH real estate
In the Philippines, the main barrier to investing in real estate is the high price, high taxes and difficulty of liquidating. A REIT solves these problems by subdividing the property into shares to lower the price point; distributing income in the form of dividends which is taxed at 10 percent rather than ordinary lease income, which is taxed between 20 and 35 percent; and by allowing shareholders to freely dispose of their real estate shares with the very favorable tax rate of 0.6 percent rather than capital gains tax of 6 percent.
Special provision for OFWs
The REIT Law has a special provision for overseas Filipino workers (OFWS). Under Sec. 14 of Republic Act No. 9856, OFWs are exempted from paying the 10 percent dividend tax for seven years beginning January 2020.
Dividend yields
The biggest difference between a REIT and a normal real estate company is that the latter is not required to issue annual dividends. The dividend yields of real estate companies are noticeably lower because REITs are required to distribute 90 percent of its earnings unlike other companies.
REITs break the barriers to investing in real estate.—INQUIRER FILE PHOTO
Factors to consider
As with any investment, there are important factors to take into consideration when investing in a REIT, such as:
• Contrary to popular notion, REITS are allowed to invest up to 25 percent of its total assets in non-real estate investments such as mutual funds. So it is important to read the disclosures on all future investments by the REIT.
• REITs need to hire an independent fund manager and an independent property manager. It is important to assess the actual independence as well as the compensation scheme for these third parties as it will affect the amount of dividends paid out.
• An investment in REITs is an investment in income-generating real property. The emphasis is on income-generating. While the appreciation in real property values will affect the share price of a REIT, the real draw of a REIT is the regular dividends. So investors should be aware of trends and current situations which might affect leasing and not necessarily property values.
The author is the managing partner of Ponferrada Ty Law Offices
