What You Need to Know About REITs
Investing in REITs will appeal more to people looking for a more stable vehicle for passive income.
The Philippines is primed as one of the most promising real estate investment hubs in the world. Thanks to the increasing remittances of our overseas Filipino workers (OFWs) and the sustained infrastructure growth in the country, the real estate sector remains to be a key driver of the booming economy.
However, it’s not quite there yet. As a matter of fact, the country’s top spot in investment rankings dropped in the Asia Pacific, and we’ve seen a dwindling number of foreign investors in recent years. For some OFWs and budding Filipino investors, real estate investing is still a challenge due to lack of an appealing and sustainable investment vehicle. This is where a fully defined and enhanced real estate investment trust (REIT) framework comes in.
A REIT is essentially any public or privately listed stock corporation that owns income-generating properties such as office buildings, commercial spaces, hotels, industrial properties and even mortgage loans. The REIT then distributes most of its earnings and capital gains as dividends to its shareholders. REITs were founded in the US in 1960’s to allow smaller investors in real estate to participate in property markets because the cost is not as hefty as directly acquiring a property.
In 2009, the Philippine Congress passed Republic Act No. 9856 or the REIT Act of 2009 to shed light on the absence of a REIT industry in the Philippines. A company can qualify as a REIT by complying with the law’s requirements that mainly revolve around long-term investment safeguards and income distribution. Some of these requirements include:
Being listed in the Philippine Stock Exchange (PSE) and distributing dividends of at least 90 percent of its net income;
Investing at least 70 percent of its total assets in real estate or real estate assets only;
Investing at least 35 percent of its total assets in real estate;
Complying with the applicable minimum public ownership requirement of the Philippine Securities and Exchange Commission (SEC);
Neither undertaking in property development activities nor investing in unlisted property development companies;
Conducting full valuation of REIT at least once a year.
At the onset, major real estate developers refused to participate primarily because of tight taxation scheme and restricting ownership provisions. But recent amendments on the law have opened better opportunities for companies to reconsider and transfer their assets to REITs.
Highlights of the redefined framework for REITs include the following: from a 67 percent minimum public ownership of such trusts, the SEC has agreed to cut it back to 33 percent; initial transfers of properties to REITs are exempt from value added tax (VAT) in accordance with Republic Act No. 10963 or The Tax Reform for Acceleration and Inclusion Act; generally, the company will not pay taxes as long as it discharges majority of taxable income as dividends, and the leverage and the portion of income derived from development are limited. Only the retained earnings are taxed, provided that the REIT meets the ownership, management, asset, income, and distribution requirements.
REITs are classified into three types – equity, mortgage, and hybrid. These variations indicate the type of business the company is centered on, as well as how its shares are bought and sold.
An equity REIT is the most common type. These companies purchase, own and manage income-generating properties and their earnings mostly come from rent collected from leasing spaces and not from the resale of real estate portfolios.
Mortgage REITs, as the name implies, lend cash to real estate owners and operators either directly through mortgages or loans, or indirectly by acquiring mortgage-backed securities (MBS). Income of mortgage REITs generally comes from the amount incurred between the earned interest and the cost of funding the loans.
Hybrid REITs offer portfolios comprised of a mix of equity and mortgage features. Such portfolios may be tipped towards more physical rental property or more mortgage depending on the investment focus of the REIT.
Two investment structures are also put up under the REIT Act – one is investing in Unlisted Funds, which are usually private equities available only to individuals who meet a particular net worth, and the other is investing in Listed Real Estate, which can be traded on the public market and generally has no liquidity problems.
Investing in REITs is much like investing in the stock market, but solely with real estate properties and assets involved. You may do so by simply buying shares of stocks in the REIT with the aid of a broker or a financial advisor. You are also given option to deposit, say, your monthly savings directly to a REIT instead of putting it in a bank, which incurs much lesser interest. An important factor to consider in choosing a REIT to invest in is the company’s management team and track record, because the key element that influences the investment’s success is proper selection, a sound strategy in picking the right properties.
The main purpose of establishing a good REIT industry in the Philippines is to create more attainable real estate investment ventures for average Filipinos and for some OFWs who can’t immerse themselves fully into the process of property investing – from choosing a property, looking for tenants, or finally selling it. A REIT addresses this pain point by creating a suitable investment portfolio. Aside from this, the advantages of investing in REITs include:
Flexibility – REITs make buying and selling of shares much easier and offer portfolios with a relatively cheaper investment amount, which makes real estate investing within the reach of people from various walks of life.
Security – Investing in REITs ensures a stable cash flow since liquidity is more absolute and the assets are diversified. The laws regulating REITs in the Philippines are also meant to develop investments that will prosper in the long term.
Low risk – Because investors in REITs generate returns from dividends and capital appreciation, they are less susceptible to risks of loss. REITs are heavily invested in income generating properties. Investing in REITs will appeal more to people looking for a more stable vehicle for passive income.
Richard Thaddeus Carvajal s a Registered Financial Planner of RFP Philippines and CEO of Philgems Realty Corp.
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