‘A lot of interest’ in REIT seen to boost markets as bicameral panel version is ratified

By Butch Fernandez | Reporter
http://businessmirror.com.ph
Wednesday, 30 September 2009 19:33

WITH the Senate unanimously ratifying on Tuesday a bicameral committee report endorsing the final version of the Real Estate Investment Trust (REIT) bill, stock exchange officials expect a flood of investments in realty assets, which they hope in turn would deepen the domestic capital market.

Philippine Stock Exchange (PSE) President Francis Lim confirmed there is “a lot of interest in REIT by the property sector” whose major players are just waiting for the law to take effect “so they can act accordingly.”

In a brief interview, Lim described the REIT as “a landmark legislation for the Philippine stock market because we are about to see the day where there are more listed companies and there will be more liquidity to our stock market in terms of REIT shares being traded through the stock exchange.”

More than that, Lim added, “we hope to see that by this law, our real- estate industry will blossom to its full potential while at the same time enabling public, small investors to participate not only in the ownership but also in the income of real estate in the Philippines.”

The PSE president admitted that at present “real estate here in the Philippines is owned by only a very few groups of people and one of the things and vision of this law is to disperse ownership of this very valuable pieces of properties.”

As approved by the Senate and the House, a REIT is a stock corporation that can invest in income-producing realty assets like condominiums, office buildings, warehouses, and the like. It allows the direct returns of real estate in a securitized form by providing a structure for real-estate investments similar to how mutual funds manage stock investments.

“REIT will not only allow the country to participate in the globalization of the real-estate investment markets but it will also contribute to the growth and development of the capital market and the country through increased investment activities,” said Sen. Edgardo Angara, its principal author. He added that the creation of a Philippine REIT industry will help the Philippines “sustain economic growth through the development of the capital market.”

The consolidated REIT bill will shortly be submitted by the Senate and the House to Malacañang for signing into law to pave the way for the creation of the legal and regulatory framework governing real-estate investment trusts in the Philippines.

Lim said that as soon as the measure is enacted, the implementing rules and regulations will be issued by the Securities and Exchange Commission, and the tax features will be crafted by the Department of Finance and the Bureau of Internal Revenue within 90 days.

In a separate interview, Angara explained that the REITs would level the playing field for real-estate players 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, without the disadvantages of illiquidity, high transaction and management costs, as compared to traditional private real-estate ownership.

“In this sense, it will democratize wealth by broadening ownership of real estate in the Philippines,” Angara said, adding that “it will also provide added revenues to the national government through income taxes, value-added taxes, stock-transaction taxes and DST that will be generated by the REITs industry.

“It will create a ripple effect in the economy in terms of increase in employment, foreign and local participation in the stock market, real estate transactions, construction, increased consumer spending and development of the capital market, in general,” he told reporters.

The law requires a REIT to be publicly listed to enable the investing public to partly own the company and share in the income of the company. There must be at least 1,000 public shareholders who, in the aggregate, own at least 30 percent of the company. The company must distribute yearly at least 90 percent of its distributable income to all its shareholders. Public shareholders are persons totally unrelated to the sponsor/promoter of the REIT, which is defined as a person who contributes property or cash to establish the REIT. The minimum paid-up capital for a REIT is P300 million.

To encourage the establishment of REITs, the law provides tax incentives to the REIT and its shareholders. The 30-percent income tax rate will be based on the REIT’s net taxable income after deducting the 90-percent dividend distribution to its shareholders. Under current law, the 30-percent tax rate is imposed on the net taxable income before dividend distribution.

Transfers of property to the REIT shall be subject to 50 percent of the applicable documentary stamp tax, registration and annotation fees. Sale of shares of the REIT through the stock exchange shall be exempt from the documentary stamp tax (DST) and the stock transaction tax of one-half of 1 percent instead of the higher rate of capital gain tax.

The REIT shall be exempt from the initial public offering (IPO) tax when it offers its shares to the public through a local stock exchange. The IPO tax is seen to be a big deterrent to private companies to raise funds from the public through an offering of their shares.  The Philippines imposes an IPO tax.  Consequently, the Philippines has very few listed companies compared with other countries in Asia, despite the fact that our stock market is one of the oldest in the region.

Dividends paid by the REIT to a domestic corporation, resident foreign corporation and OFWs shall be exempt from the 10-percent dividend tax. In case of overseas Filipino workers (OFWs), the exemption shall be good for seven years from the effectivity of the tax regulations implementing the law.