Is it time for a Philippine Real Estate Investment Trust (REIT)? Governments around Asia have had REITs since early 2000. Japan and Korea were the pioneers. In just five years, the number of REITs has gone through the roof, from merely five in 2001 to around 80 in 2006. This includes Hong Kong, Malaysia, Singapore, Taiwan and Thailand.
REITs have also been around in countries outside Asia: Australia, Belgium, Bulgaria, Canada, France, Germany, Italy, the Netherlands, New Zealand, South Africa, Turkey, the United Kingdom and the United States (where the concept originated). China, India and Pakistan, on the other hand, are in the process of introducing REITs.
A brief explanation for those unfamiliar with this unique income-oriented asset class: A REIT is a tax designation for a corporation investing in real estate that reduces or eliminates corporate income taxes. In return, REITs must distribute at least 90 percent of their income. A REIT is designed to provide a similar structure for investment in real estate as mutual funds provide for investment in stocks. Like other corporations, REITs can be publicly or privately held. Public REITs may be listed on a public stock exchange, like shares of common stock in other companies.
REITs carry with them manifold benefits. REITs level the playing field for real-estate actors. It does this by allowing small and large investors alike to participate directly in the ownership and financing of large-scale real-estate projects at affordable rates of investment. REITs don’t have the disadvantages of illiquidity, high transaction and management cost, as compared with traditional private real-estate ownership. REITs offer higher yield. While interest rates on savings account are below 1 percent per annum, REITs are paying an average of 5 percent to 9 percent. This is made possible through a steady stream of income from rents. Shareholders enjoy big dividends, as REITS are required to return at least 90 percent of earnings.
REITs also smooth out overall returns, especially during market downturns. They are protected against declining prices of stocks and bonds. Their tangible assets and long-term lease contracts make them one of the most stable companies in the market.
REITs provide steady income to investors and the national government. What’s more, they will encourage strategic foreign investment in the capital market. According to Global Real Estate Investment Trust Report 2008 of Ernst & Young, the total market capitalization of publicly listed REITs around the world reached nearly $605 billion. REITs in Asia have been the best performers, with South Korea first in the rankings. With China’s pilot REIT project set to begin in 2009, there is renewed interest in the public REIT sector in Asia. Take note that Asia is poised to overtake Europe as the second-largest REIT market in the world. In a few years, it will challenge North America’s No. 1 standing.
Finally, REIT translates to a stable real-estate industry, which, in turn, translates to a stable economy. It is undeniable that the strength or weakness of economic activities in real estate has the capacity to stimulate or dampen economic growth in all areas.
It is for this reason I authored and am sponsoring on the Senate floor a Real Estate Investment Trust Act (REIC). Now is the most opportune time to establish a Philippine REIT. We have a strong real-estate industry driven by the influx of remittances from overseas Filipino workers, the boom of tourism, and the growing number of offshore businesses in the country.
We need REIT to build up our capital markets and help businesses thrive. This will cushion against the crunch in the short term, and strengthen the financial system in the long term. Our neighbors thought globally, and so they reaped globally.
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SENATE PASSES REIT BILL
Wednesday, 04 March 2009 05:33
THE Philippine Stock Exchange (PSE) said the Senate passed on third reading a bill that would broaden investments in real estate and related assets.
In a statement, Francis Lim, PSE president and chief executive officer, said the Real Estate Investment Co. (REIC) bill, when enacted into law, would allow the establishment of a corporation for the purpose of owning income-generating real estate and related assets whose shares of stock will be made accessible to small and large investors alike. Markets for real estate investment trusts (REIT) already operate in other countries.
Lim said the REIC bill would also develop the country’s infrastructure system such as highways, airports, bridges and tollways. It can also strengthen tourism with shopping center developments, additional hotels, condominium and hospitals.
“The proposed law mandates the listing of these stocks in a stock exchange to enable the general public to participate, through equity ownership in the REIC and enjoy a stable source of dividend income. A REIC must be owned by at least 30 percent of the investing public and it must distribute annually at least 90 percent of its distributable income to its shareholders,” Lim said.
“Under the law, ordinary Filipinos will not only own a part of a mall or hotel but will also share annually in the income of these establishments. I believe the REIC system is a win-win for our economy because it presents an attractive investment vehicle for local and foreign investors, thereby accelerating the growth of the local stock market,” he said.
The Asian REIT markets have shown strong growth potential with their combined capitalization of $68.3 billion in 2008, up from $46 billion in 2006. Asian REIT’s contribution to the total global market capitalization last year likewise grew to 11.3 percent from 7.6 percent in 2006.
As of 2008, the number of listed REIT in Asia represented close to one-fifth of the total across the globe.
The law will also enhance shareholder value as the base for the income tax of the REIC is determined after the dividend distribution. The REIC is mandated to distribute at least 90 percent of its net income to its shareholders.
“To give a concrete example, if the net income of the REIC is P100 million and distributes P90 million to its shareholders, it will be taxed only on the P10 million,” Lim said.
The House version of the REIC bill is awaiting consideration by the chamber’s Ways and Means Committee.
