Philippines in the REIT race

The Philippines can take better advantage of the current upswing in the local property market if the real estate investment trust (REIT) system were to be finally implemented.

“The full implementation of REITs places the Philippines at par with other Asian economies that have fully developed capital and real estate markets,” said Colliers International Philippines.

“Colliers believes that REIT implementation will result in the further differentiation and innovation of property development projects in the Philippines which should eventually benefit Filipino investors and end-users,” it further said.

Restrictive policies

Although the REIT Law (Republic Act No. 9856) was enacted a decade ago, this new asset class however failed to get off the ground as certain restrictive policies in terms of the required minimum public float of a REIT and provisions on value added tax, primarily dissuaded firms. There were also fears that proceeds from the REIT offering would be invested overseas, instead of funding local property projects.

By definition, a REIT refers to a company that owns, operates or finances income-generating assets such as offices, hotels, shopping malls and infrastructure venture. For companies, a REIT offers them a new avenue to raise funds, while investors are given the opportunity invest directly in products that are income-generating.

Colliers expressed confidence that the REIT system will finally be implemented this year as the government has agreed to relax the law’s restrictive rules. In April this year, one of the country’s top developers already announced plans of raising about $500 million from listing certain office buildings in Makati City through the REIT framework.

Benefiting other segments

“Aside from traditional asset classes such as office, retail, warehouses and hotels, Colliers believes that other segments of the economy are likely to benefit from the launch of REITs in the Philippines. With the government being more active in attracting private sector investment, property firms should also explore possible public-private partnership (PPP) projects that cover hospitals, schools and toll roads,” Colliers said in a statement.

“Developers should be on the lookout for the enactment of the proposed relaxation of foreign ownership cap on construction and retail sectors. In our opinion, easing of foreign ownership restrictions in these sectors should contribute to a more attractive REIT industry in the Philippines moving forward,” Colliers added.

Recommendations

To best take advantage of REITs, Colliers urged developers to consider divesting their properties into REITs to access a cheaper source of capital; use REIT proceeds to renovate and reposition assets such as offices, malls and warehouses; and use REIT funds to develop integrated communities in key cities outside Manila.

It likewise recommended to developers to set aside a portion of the proceeds to acquire reclaimed land in Manila; use REITs as a benchmark for valuing assets; and to acquire co-living and co-working facilities that could be diversified into a REIT.

“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,” Colliers further added.