REIT public ownership rule worries industry

The Philippine Stock Exchange (PSE) and the real estate industry have raised concerns about the required minimum public ownership of a real estate investment trust (REIT) and the imposition of value-added tax on the initial asset transfer—two issues seen adversely affecting the viability of REITs.

The Philippine REIT law allows property developers to raise funds by selling assets with recurring revenues, specifically by transferring those assets in a special purpose vehicle that should be listed on the PSE. The new instrument gives investors the option to invest directly in the finished product and not just in the property developer.

The REIT law also requires the distribution of 90 percent of the income generated by the company yearly. This means investors can look forward to earning much more from dividends on top of potential stock price appreciation.

In a statement, the PSE and Asia Pacific Real Estate Association (Aprea) said they would like to continue working with the Department of Finance and the Bureau of Internal Revenue to ensure a successful and viable REIT environment in the country.

But these organizations are concerned about the required minimum public ownership (MPO) and the VAT to be imposed on the initial asset transfer.

While the proposed initial 40-percent MPO rule applicable during the first three years of a REIT’s operation is acceptable to the private sector, it is widely believed that the proposed increase to 67 percent by the third year—which would require a significant mandatory sell-down by the REIT sponsor—would not be viable.

“The 67-percent MPO requirement remains a very difficult issue and is, in fact, the subject of an appeal to the Securities and Exchange Commission by the private sector property players, including the different associations affected by this requirement,” said Aprea chief executive officer Peter Mitchell.

Mitchell said the MPO requirement in other countries was significantly lower than the proposed levels. Singapore’s is 10 percent; Australia, 25 percent; Hong Kong, 25 percent; and Malaysia, 25 percent.

Mitchell added that in previous conferences hosted or participated in by Aprea, interest in the REIT market in the Philippines remained strong.
“REITs can stimulate not only the capital and property markets, but also the entire investment landscape of the country, as has been experienced in Singapore and other jurisdictions,” Mitchell said.

PSE president Hans Sicat said the local bourse was supportive of a review of the MPO rule, noting this would otherwise create a market overhang affecting even small individual investors.

“The PSE as well as the real estate industry and affected organizations are all willing to work with the Department of Finance to have a viable and investment-friendly REIT in order to send the right signals to the potential investors,” Sicat said.

Sicat further noted that the initial public offering proceeds from the REITs were expected to be invested by major reputable players in the specific priority areas that the Aquino administration was focusing on, namely infrastructure, mass housing, business process outsourcing and tourism.

Most foreign investors buy REITs on the basis of the sponsor’s name behind them, thus, a number of them prefer sponsors to take majority ownership to ensure their commitment to the success of the REIT, Sicat said.

“It will be unfortunate if none of the quality players will participate in a legislation that took years to develop, and in what could have been a big step forward in real capital market development in the country. Note that such rule will even limit the addition of new property investments by the sponsors into the REITs,” Sicat said.