REIT Act Republic Act 9856 or REIT Act of 2000 and the Securities and Exchange Commission (SEC) Implementing Rules and Regulations (IRR) established REIT on May 13, 2010. On January 20, 2020, the SEC issued Memorandum Circular No. 1 (Series of 2020) on the revised IRR. The new IRR took effect on February 7, 2020.
Major provisions in the amended Implementing Rules and Regulations consist of the following:
1. The REIT’s MPO or Minimum Public Ownerships was reduced to a minimum of one-third of its outstanding capital. There should be at least 1,000 public shareholders with each one owning a minimum of 50 shares.
2. Reinvestment in the country has become mandatory for those who contribute income-generating real estate to REITs. Therefore, relevant listing rules oblige the submission of a reinvestment plan with a company planning to reinvest proceeds obtained from REIT shares and securities sales issued in return for income-generating real estate moved to the REIT. It also includes money earned from the sale in any real estate like infrastructure or redevelopment projects in the country. The sponsor/promoter must perform the reinvestment within one year from the receipt of the proceeds.
3. Under the amended IRR, most of the board of directors of the REIT fund manager must have independent status. These directors must not hold more than 49 percent of the board. To be considered compliant with the REIT Act’s track record requirement, the CEO and two full-time employees must have experience and a good reputation in the industry before their employment. The SEC reminds all companies engaged in property and fund management to review these new requirements and evaluate their compliance.
Rules for Corporations
This legislation along with the guidelines provide businesses an opportunity to put their real estate assets in the REIT where the public can also invest and buy shares. The following are the rules for these corporations:
1. The business must be registered with the PSE or Philippine Stock Exchange.
2. It must comply with the PHP300 million paid-up capital.
3. The company needs a minimum of 1,000 public shareholders with a minimum of 50 shares each.
4. It should maintain at least 33 percent public float which represents the part of the corporation that the investing public owns.
5. There must be 70 percent of investments in real estate assets. In short, 35 percent of the total assets have been invested in real estate.
6. At least 90 percent of the net income is distributed to shareholders as dividends.
7. The corporation is not allowed to invest in companies that are not publicly listed.
8. There must be an annual valuation of the company.
The company can purchase, lease, manage, or sell real estate properties coming from the funds collected from investors.
Similarity to Mutual Funds
Real estate investment trusts are like mutual funds. REITs have benefits for investors.
- Minimum capital is needed. Investors do not need to produce enormous capital or borrow money to become part-owners of a real estate firm.
- Investors are eligible to receive 90 percent of the net income.
- Investors are not involved in property management.
- Stock prices may increase because of increasing demand, the value of the property, or development around the area.
- Assets are considered finished and generate income.
- REITs may be traded on trading days at the stock exchange.
- It is mandatory for companies to disclose their financial status to shareholders.
- All OFWs can enjoy tax-free dividends starting in 2020 and up to seven years.
However, it is possible for companies to own buildings or structures but not the properties where these are located. In this case, shareholders are deprived of the opportunity to benefit from the increase of lor or land value. Furthermore, real estate is recurring which means the market is affected by factors such as high vacancy leading to lower revenues. Real estate is also subject to tax hikes implemented nationwide and locally. Finally, the growth is slower compared to other equities because the income is disseminated to shareholders as dividends.
REITs “Opportunities
Department of Finance Secretary Carlos Dominguez III was quoted in a local newspaper saying, “REIT offerings will propel the growth of the Philippines’ property sector beyond the pandemic-and serve as one catalyst for the country’s quick and strong economic recovery.” In fact, the REIT is a means of raising the money needed to spur property development. Likewise, it uncovers investment opportunities for many Filipinos. Some economists believe industrial properties have a big potential. The industrial sector will continue to flourish primarily due to the completion of major infrastructure projects in different parts of the Philippines.
Developers must upgrade their warehouses continuously to keep up with the needs of logistics tenants. Industrial assets refer to appealing REIT properties which should be included in developers’ portfolios. The demand for modern logistics facilities has been growing on the back of thriving e-commerce and a lockdown economy that is projected to rebound at a much faster pace beyond 2021.
Agriculture is another booming sector. Large and abundant industrial lands present investment prospects for people because of their potentially high ROI and serve as a hedge against inflation. Investors in farmlands can buy shares in a farmland REIT. Meanwhile, businesses have the option of buying raw or cultivated agricultural lands in various locations. This will provide local farmers with more diversification because they can own stakes in several farm properties.
The expansion of REITs to other industries which include the renewable energy sector widens opportunities for revenue generation that the public can take advantage of. REITs earn income regularly since these are income-generating real property assets within the scope of RA 9856 or the Real Estate Investment Trust Act. Filipino investors will gain from REITs that cover other industries as they can look forward to yearly dividends as mandated by law.
Economic Recovery
Economists are optimistic about recovery and eventual growth as the pandemic starts to recede. While more companies establish REITs, the government must amplify and improve the benefits that come with the real estate investment trusts.
Observing the property market and its key players, on top of looking for advice from credible business advisors will also help investors come up with smart decisions.