A deep dive into reit

Inquirer Property’s recently aired webinar, “Are we right about REIT?”, garnered so much traction that it had been swamped by questions from interested investors and media. April Lynn Tan, first vice president, corporate strategy, and chief investor relations officer of COL Financial answers some of the questions that weren’t mentioned on air.

Q: How much would be the minimum dividend yield that you would consider to be reasonable given local inflation rate and cost of money trends?

A: Determining the minimum dividend yield is difficult because the first REIT was only listed in the Philippine Stock Exchange in 2020. As such, we do not have enough historical data to determine the average spread of dividend yields over bond yields.

However, there are some rules that apply to all financial instruments including REITs. A REIT’s dividend yield should always be higher than the Philippine 10-year bond yield because REITs are riskier compared to government bonds. Therefore, if interest rates go up, expect the prices of REITs to go down to maintain the spread of dividend yields over bond yields.

REITs with less attractive assets (i.e., more volatile cash flows, a weaker growth outlook) and that are smaller in size and are less liquid should also provide investors with higher dividend yields to compensate them for the higher risk.

Q: Is there a chance for dividend yields to be more than 10 percent?

A: It is possible for dividend yields of REITs to go above 10 percent. However, this is highly improbable under normal circumstances. Examples of circumstances that could push dividend yields beyond 10 percent include a steep rise in interest rates, or a crisis that raises concerns regarding the sustainability of REIT’s earnings and cash dividends.

Q: Can REITs be included in PSEi index?

A: Yes, if a REIT meets the PSE’s criteria for being part of the index which are: it has a free float level of at least 15 percent; it is among the top 25 percent by median daily value per month for at least nine out of 12 months, and; it belongs to the top 30 based on full market capitalization.

Q: If a lifespan of a building is more or less 50 years, how could this affect the REITs?

A: If maintained well, a building can last beyond 50 years. For example, the newly restored Manila Metropolitan Theater is now more than 50 years old. However, if the cost to maintain an old building is no longer economically feasible, the REIT company can decide to sell the building back to its REIT sponsor and use the proceeds of the sale to buy a newer building.

Admittedly, the sale of an old building by a REIT company could lead to a decline in profits and cash dividends. However, the impact should not be significant if the REIT company has a diversified portfolio of several buildings with varying ages.

Q: Is there a property bubble in the Philippines? If there is, how would the REITs be affected?

A: All REITs that are listed (and will be listed) in the Philippine Stock Exchange are focused on the office property segment and they will be negatively affected if there is a bubble. However, there is currently no bubble or oversupply of office properties, especially among Grade A offices catering to BPOs (business process outsourcing) and large corporate clients. If there were, vacancy rates would go up and lease rates would go down, which are not happening. All REITs are currently enjoying occupancy rates of more than 90 percent and higher annual lease rates.

This webinar was supported by AREIT, DDMP REIT, Megaworld Corp., and Sta. Lucia Land Inc. You can watch the replay of this webinar via the Inquirer Property’s Facebook page (https://www.facebook.com/INQ.Property/)