REITs may draw $2.4B in investments

The Philippines may generate at least $2.4 billion in new investments from the private sector once Real Estate Investment Trusts (REITs) are approved for listing, Philippine Stock Exchange (PSE) president and CEO Hans B. Sicat said.

In a press briefing after a forum on REITs in Makati City, the PSE chief said the bourse is reviving talks with industry and investment stakeholders to address the current issues on REITs and try to find a workable framework acceptable to all parties.

Sicat said having a number of large REIT issues would help boost the stock market.

“Based on the feedback that we received during the forum, as well as the various queries from potential REIT investors, we gather that there is still overwhelming interest in investing in REITs in the Philippines,” Sicat said. “However, competition for capital is increasing internationally and the Philippines must ‘get in the game’ soonest in order to get investments.”

At the same time, Securities and Exchange Commisison (SEC) chairperson Teresita J. Herbosa said that this may be a “good time to review” the rules related to how much of REIT companies should be offered to the public.

Herbosa said that while tax issues depend on the Bureau of Internal Revenue (BIR), the SEC is open to the PSE’s proposal to have such securities sold by highly capitalized companies have lower minimum public ownership levels than small caps in order to encourage more investments.

Bangko Sentral ng Pilipinas Governor Amando M. Tetangco Jr. said REITs would enhance the quality of the domestic financial market since there would be more funding options for corporates.

“[This], in turn, would mean these corporates would no longer have to rely mainly on bank credit. The vulnerability of the banking system will be reduced correspondingly,” Tetangco said.

REITs will democratize ownership of properties and as such, will benefit not only corporates but regular, individual investors as well, CB Richard Ellis Investors Japan K.K. portfolio manager David C. Fan said.

Asia Pacific Real Estate Association Limited CEO Peter F. Mitchell said other countries, like Singapore, that were early adopters continue to tweak their REIT rules based on market feedback. As such, he said it is important to get REITs started in the Philippines and see what actually work for the market.

The REIT law was passed in 2009, and subsequently, implementing rules were issued by both the SEC and the BIR last year. However, the interest in participating in the REIT from any of the industry players have been dampened by the stringent rules related to the minimum public ownership, as well as the imposition of value added tax (VAT) and the requirement for escrow.

Under the revised SEC rules, the MPO required for a REIT to be entitled to the tax incentives is at least 40 percent in the first year, which should be increased to 67 percent by the end of the third year.

The increase in the required minimum public ownership level to 67 percent is unappealing as it creates “a huge market overhang,” PSE said in a statement.

The BIR further imposed a requirement that REIT companies have to set aside in escrow an amount equivalent to the tax incentives and this amount will be forfeited in favor of the government should the REIT company fail to increase minimum public ownership to 67 percent after the third year. There have been concerns raised on how this requirement can be aligned with the requirement of the law to declare up to 90 percent of its yearly earnings as dividends.

The other issue pertains to the imposition of VAT on initial asset transfers to the REIT. In order to set up a REIT, the potential issuer must form a REIT corporation to which the issuer will have to transfer its REIT-able assets. Ideally for the PSE, such transfers should be tax-exempt.

The BIR decided, however, to subject these transfers to VAT. The imposition of the VAT, if based on the fair market values of the properties, may dampen the yields on Philippine REITs, further making them uncompetitive compared to regional counterparts.

According to PSE, the imposition of VAT may likely be more acceptable to the issuers if based on the “assessed” values of the properties to be transferred, the same asset valuation appearing in their real property tax declarations.

“While we understand the need of the national government to protect its revenue streams, we believe that over the long term, the benefits of the REIT to the whole economy will far outweigh its perceived negative short-term effects on the government’s revenues. We also believe that given the improved ratios of the country, any perceived reduction in upfront revenues should not significantly impact on the objectives of the government at the fiscal front. We hope we can find a reasonable middle ground that addresses the concerns of both sides,” Sicat said.