Why buy REITs?

Looking for a more affordable way to own apartments, offices, malls, warehouses, or even hotels? Then you should consider buying a real estate investment trust (REIT).

A REIT is a company that owns and manages income-generating assets or real estate properties like those mentioned earlier. For a company to qualify as a REIT in the Philippines, at least 75 percent of deposited property must be income-generating real estate. Also, at least 90 percent of distributable income must be paid out as cash dividends to investors. Finally, it must be listed in the Philippine Stock Exchange.

Traditionally, REITs are comprised of income-generating properties such as apartments, offices, malls, warehouses and hotels. However, companies that generate steady income such as utility companies, toll roads, airports and hospitals can also form REITs.

One of the main incentives for asset owners to transfer their income generating assets to a REIT is the income tax benefit.

Note that distributable income paid out as cash dividends by REITs are exempted from corporate income taxes. This gives returns a significant boost because of the Philippines’ high corporate income tax rate of 30 percent.

Aside from tax savings, property owners unlock the value of their properties (or assets), allowing them to raise capital that can be used to pursue other investment opportunities to help profits grow.

For retail investors like us, buying REITs is attractive because it allows us to enjoy passive income outside of traditional financial products such as time deposits and bonds. Moreover, dividend yields of REITs are usually higher compared to yields on time deposits and bonds.

Investors also enjoy the benefits of owning income-generating assets even without having a lot of capital. These include rental escalation or tariff hikes, higher occupancy rates or growing demand, capital appreciation, leverage and diversification.

Finally, because REITs are listed, they are liquid and can be sold easily. This is not possible when investing in physical properties or private companies.

In analyzing REITs, investors should look beyond yields. We should also evaluate the quality of assets that are part of the REIT as this would determine whether yields have room to go up.

For example, in evaluating a REIT comprised of office properties, we should know the demand outlook for offices, the quality of the buildings and locations of the offices that are part of the REIT. We should also know if the REIT has growth plans and how it plans to execute these plans. Does the REIT have room to increase borrowings or does it plan to sell more shares in the market?

The Philippines already has a REIT law that has been in effect for more than 10 years. However, there have been no REIT listings because of contentious issues in the original implementing rules and regulations (IRR). For example, REITs were required to have a minimum public ownership of at least 40 percent, increasing to 67 percent within three years of listing. The transfer of assets to a REIT was also not VAT-exempt under the original IRR.

Early this year, the Securities and Exchange Commission finally lowered the minimum public ownership to 33 percent. The Bureau of Internal Revenue also recently made the transfer of assets VAT-exempt, provided that the REIT acquires at least 51 percent of the outstanding voting capital stocks of the transferee.

These changes, in our opinion, should finally pave the way for REIT listings.

As of today, Ayala Land and Double Dragon have already expressed interest to list REITs. Other property companies, utility and infrastructure companies could also list REITs soon given their huge income-generating portfolios and the benefits of listing a REIT.

This development is something that retail investors should monitor and take advantage of. INQ

April Lee-Tan, CFA, is the chief equity strategist of COL Financial, the Philippines’ leading online stockbroker. She has over 20 years of experience covering the Philippine stock market. She heads the COL research team. For her market insights, follow @AprilLeeTan and @colfinancial on Twitter. For comments and suggestions, email [email protected]