Real Estate Investment Trusts (REITs) – The next big thing in real estate

A post by Cherry Castillo

I have come across many comments from OFW’s who want to invest in real estate in the Philippines but have no one to rely on to do the legwork in the country – choosing a property, collecting rents, etc. There are also those who want to invest in real estate but are more conservative or risk-averse, or those who only have a small amount set aside for investment.

For the beginning real estate investor or the OFW investor, one solution is to invest in a Real Estate Investment Trust (REIT). Please continue reading about REITs below…

What is a REIT?

A “Real Estate Investment Trust” or “REIT” is a stock corporation established principally for the purpose of owning income-generating real estate assets. A corporation becomes a REIT and qualified to avail of the incentives and privileges of the REIT Act when its REIT Plan is rendered effective by the Commission and its listing as a REIT is approved by the stock exchange.

REIT Law and Regulations

Republic Act (R.A.) No. 9856 “An Act Providing the Legal Framework for Real Estate Investment Trust and For Other Purposes” lapsed into law on December 17, 2009. It was published in two newspapers of general circulation on January 25, 2010. Thus, its effectivity is on February 9, 2010 or fifteen (15) days from such publication. Please click on this link for a copy of the full text of R.A. No. 9856.

Many investors were excited with the passage of R.A. No. 9856 but everybody had to wait first for its Implementing Rules and Regulations (IRR). Definitely, the release will be very soon as the Securities and Exchange Commission (SEC) released just last Monday, April 19, 2010, the draft (IRR) for comments until April 26, 2010 (a copy of the draft REIT IRR is now available here: Draft REIT Act of 2009 Implementing rules and regulations (IRR) released by the SEC ). A summary of the salient features of the RA 9856 IRR was prepared by Businessworld, in its article entitled “Draft REIT rules issued by regulator” which can be accessed at http://www.bworldonline.com/main/content.php?id=9485.

Philippine REITs

SM Prime Holdings, Inc., the country’s largest mall operator, and property giant Ayala Land, Inc. (ALI) are looking at raising $300 million each through a REIT. [See http://www.smprime.com/smprime/index.php?p=587&type=2&sec=49&aid=5466 and http://www.ayalaland.com.ph/article/ayala_land_to_raise for more information on the plans of SM Prime and ALI.] This early, the country’s real estate giants have already set their sights on the REIT and have engaged financial advisers to guide them with their plans. This is a clear sign that the REIT is bound to be a gold mine.

Why invest in a REIT?

A REIT is entitled to several tax incentives, so much so that the Department of Finance has warned that the government stands to lose billions of pesos due to the passing of the REIT Act and IRR. Of course, as investors, we want to pay the least tax as legally possible. Based on the draft IRR, the following are some of the incentives of REITs:

• A REIT shall be subject to regular corporate income tax but not minimum corporate income tax (MCIT);
• Any sale or transfer of real property to a REIT, including the sale or transfer of any and all security interest thereto shall be subject to fifty (50%) percent of the applicable DST;
• All applicable registration and annotation fees relative or incidental thereto shall be fifty (50%) of the applicable registration and annotation fees;
• Any sale, barter, exchange or other disposition of listed investor securities through the Exchange, including cross or block sales with prior approval from the Exchange shall be exempt from DST;
• Any initial public and secondary offering of investor securities shall be exempt from the IPO tax imposed under the NIRC;

• The gross sales from any disposal of real property or gross receipts from the rental of such real property shall be subject to VAT;
• A REIT shall not be considered as a dealer of securities and shall not be subject to VAT on its sale, exchange or transfer of securities forming part of its real estate-related assets.

Also, a REIT shall be required to distribute at least ninety (90%) percent of its distributable income every year so investors get regular dividends. In addition – this is good news for OFWs – overseas Filipino investors are exempt from the dividends tax for seven (7) years from the effectivity of the tax regulations implementing the Act. If a domestic corporation is the REIT investor, the dividends will be exempt from tax.

Aside from dividends of course, you also stand to gain if the shares appreciate. I think that REIT is a marriage of real estate and stocks – two of the best investment vehicles that would produce the most wealth. If you look at the world’s or the country’s wealthiest persons, you will see that many grew their wealth from real estate (think Henry Sy, the Ayala family) or stocks (think Warren Buffet). So, no need to think which one between real estate and stocks is better!

How do we invest in a REIT?

You may invest in a REIT by subscribing to or purchasing shares of stock of the REIT. The investment amount may be affordable to most people, and you can purchase a blue chip REIT in the Philippines like that of Ayala Land, Inc. or SM Prime Holdings, Inc. You may even choose to put your monthly savings in a REIT instead of banks which earn very little interest.

Comments about REIT?

If you have any comments on the draft IRR, please send them to the SEC. On my part, I’m planning to invest my monthly savings in Ayala and SM prime REITs (after I finish paying off my debts to my husband, tsk tsk). I wish to buy REIT stocks on the first day and watch them skyrocket later! *crosses fingers* I also hope to be part of the team advising REITs as I think it’s really the next wave, so to speak. REITs are also all the rage in other countries.

So… I’ll let you know once the IRR is finalized. Till then, let’s chew on the draft and envision the endless possibilities… like a Foreclosure Philippines or RYP Realty REIT right up there with Ayala and SM Prime! That would be awesome! The P300 million minimum capitalization is doable if you break it up into small amounts – just around P100k for each subscriber of Foreclosure Philippines!

Cherry Castillo

Cherry is my wife. She is a certified public accountant (CPA) and lawyer.

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To our success and financial freedom!

Jay Castillo

Real Estate Investor

Real Estate Broker License #: 20056
Blog: https://www.foreclosurephilippines.com
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Text by Jay and Cherry Castillo. Copyright © 2010 All rights reserved.

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