By Julius Guevara
The Philippines joins the list of Asian countries that have recently introduced the real estate investment trust as a viable investment vehicle. The Philippine REIT Summit held in Manila last July featured local and multinational fund managers such as ING, RREEF, Citibank and First Metro as well as local developers Ayala Land, Robinsons Land, SM Prime and regional REIT players Axis REIT and Ascendas as they discussed how the new Philippine REIT law could be best implemented to the Philippine market.
“REITs (in the Philippines) is a financial product whose time has come,” said Francisco Sebastian, President of First Metro Investment Corp. Pointing out the lack of good investment options and the Filipinos’ high savings rate of 30%, Mr. Sebastian surmised that REITs will enable savings to be channeled into productive economic capital. Paul Joseph Garcia, Chief Investment Officer of ING Philippines, also added that “as investment managers, we are actually very excited for this asset class. The Philippine property market is in the process of undergoing a significant breakout… property prices have not even breached the previous all-time highs that we’ve seen in the ’90s prior to the Asian financial crisis, and for me that’s a good sign.”
Local developers also welcomed the introduction of REITs to the country. Frederick Go, President and COO of Robinsons Land commented that “(REITs) are a very efficient way for developers like ourselves to raise capital, and most of the funds that we generate will be employed back into developing more properties.”
Fueled by the tremendous growth in business process outsourcing (BPO) industry as well as remittances from 3 million overseas Filipino workers, the Philippine real estate industry has been on an upswing for the past few years. While the Philippines was also affected by the global financial crisis in 2008, the real estate industry and the economy as a whole have rebounded strongly. “The Philippines is a very defensive market,” noted David Fan, Managing Director of CBRE Investors Japan. “People continued to shop, rents were stable, there was a little bit of correction with housing prices, but now things are looking quite positive.”
Philippine REIT (P-REIT) proponents are counting on these strengths to further propel the REIT market in the country. The Philippines is second only to India in terms of providing offshore BPO-related services worldwide, and would continue to provide steady demand for office space. In 2009, revenues for BPO-related services amounted to US$7.2 Billion, an increase of almost 20% from the previous year. Because of strong growth, BPO demand for office space resulted in single digit vacancy rates for Metro Manila’s CBD’s during 2004 to 2007.
The growing number of Overseas Filipino Workers (OFWs) is also propping up demand for real estate-related products, particularly in housing and retail. As these OFWs send money back home to their families, the funds are invested in condominiums or used to purchase consumer goods. Eight million Filipinos are currently working abroad, with an additional 3,000 leaving the Philippines daily for jobs abroad. Total remittances from OFWs amounted to US$ 17.3 Billion in 2009, and are expected to increase by 6% in 2010.
Philippine REIT Structure
The Philippine REIT Act was introduced in December 2009, and implementing regulations are currently being drafted. In order to achieve REIT status, at least 75% of the entity’s income should come from income-producing real estate. As in other countries, the P-REIT allocates 90% of its distributable income as dividend to its investors. The company should also be listed on the Philippine Stock Exchange with a minimum of 1,000 public shareholders holding at least 50 shares each and who in aggregate own at least one-third of the outstanding capital stock of the REIT. While P-REITs are technically considered as corporations, they are referred to as real estate investment trusts in order to adhere to internationally accepted definitions. Since the REIT operates under the Corporation Code, it is still subject to income taxes but is not subject to the minimum income tax of 2% of gross income. Other transactions taxes are either reduced or waived.
Furthermore, P-REITs are modeled after other REITs in the region, following an externally advised structure which requires the services of an independent fund manager and property manager to ensure transparency and fulfillment of fiduciary duties to the REIT shareholders. The fund and property managers can charge up to one percent each of the REIT’s net asset value as management fees.
One limitation that may prevent the growth of the P-REIT industry is the implementation of the limitations on foreign ownership of property to only 40%. Another possible setback is that the P-REIT is not allowed to develop property unless it plans to hold the property for at least two years after completion. Furthermore, the Bureau of Internal Revenue still has to come up with implementing rules and regulations, and has appealed for some revisions to the REIT law that would balance their tax revenues and REIT profitability.
Opportunities for P-REITs
Most of the local developers opined that P-REITs would first be introduced in the retail sector. Mr. Go of Robinsons Land indicated that they are preparing for retail REIT issuances “primarily because they have been the most stable, the most consistent revenue generators of the company in the last two decades.” Jaime Ysmael, Chief Financial Officer of Ayala Land, also pointed out that “the Philippines is a consumption-led economy,” with personal consumption expenditure comprising over 70% of the local GDP. He added that half of the US$17.3 Billion in remittances from overseas Filipinos benefits the real estate industry. “’Malling’ is a way of life for Filipino families… Manila’s large malls have average foot traffic of 200 to 500 thousand visitors a day.” This translates to strong demand for retail, which has had an annual growth rate of 10% for the past 10 years and has had occupancy rates of more than 90%. Rental rates have also increased by 4% annually since 1996.
The participants also pointed out opportunities in the residential sector, with the country’s burgeoning population growth and a housing backlog of 2 million housing units. Increasing purchasing power due to OFW remittances would also support demand for housing. Similarly, representatives from CBRE and Ascendas pointed out that the increased demand for consumer goods bodes well for the industrial sector, particularly in warehousing and logistics. Opportunities also exist for BPO-related office facilities going into a REIT structure, as demand continues to grow. Lastly, there are opportunities for infrastructure funds to participate in public-private partnerships with the Philippine government through the REIT structure.
“I think the launch of the REIT in the Philippines is a tremendous first step,” said Ascendas South East Asia’s Loh Wai Keong as he shared his experiences in the Singapore market. “The next step would be to see how the industry would help grow the quality of the fund managers and asset managers. Once you launch your REIT, most will be first attracted to the yield, but at the later stage when your REIT is traded on the stock market, the investors will reward you with good yield compression if you can show a good track record of growth in your revenues. That gives you a very cheap source of equity for you to raise more funds, and you can go on to develop new property. That’s a very important virtuous cycle that you need to hold on to.”
