The REIT Stuff: 10 Things to Know Before You Invest
After being lulled into a COVID-19 pandemic stupor the past year, the Philippine stock market is now abuzz with exciting news about upcoming initial public offerings (IPOs) and new investment opportunities such as real estate investment trust (REIT).
A REIT is a company that owns and operates income-generating real estate assets such as offices, apartment buildings, hotels, shopping centers, and infrastructure. Its income stream can come from lease rentals or steady increases in the value of land.
Since the market saw the first REIT debut in August 2020, three more REITs are in the offing in 2021, including a subsidiary of Filinvest Land Inc. (FLI), Cyberzone Properties, Inc. (CPI), which filed an application with the Securities and Exchange Commission (SEC) last March to sell as much as P14.9 billion worth of REIT shares through an IPO.
“There are around 90,000 investors already attracted to REITs,” said Atty. Francisco Ed. Lim, former Philippine Stock Exchange (PSE) president and CEO, in a REIT webinar last May 20 organized by the Financial Executives Institute of the Philippines (FINEX). Atty. Lim is also senior legal counsel at Angara Abello Concepcion Regala & Cruz who helped draft the bill on Republic Act No. 9856, otherwise known as the Real Estate Investment Trust Act of 2009.
Ready to jump into the bandwagon of REIT investors? Before you do, here are the top 10 things you need to know about this fresh financial concept:
1. You don’t need to buy land or manage properties on your own to be an investor. By buying shares in a REIT, you can tap into areas of the real estate market and potentially earn dividends without purchasing or managing the property yourself, or even taking out a loan. You just need to sign up with a stock brokerage, do due diligence, and invest smart.
2. A REIT portfolio involves an extensive array of income-producing assets. A REIT’s portfolio can range from offices, apartment buildings, hotels and serviced residences, shopping centers, and infrastructure, to warehouses, data centers, industrial estates, logistic centers, airports and seaports, student housing, medical facilities, hospitals, hotels, resorts, highways, railroads, and even senior living facilities. As long as the property is attached to the ground and meets the investment criteria under the law (such as having a good three-year track record from date of acquisition), then it can be part of a REIT.
3. REITs aid wealth creation and distribution. Various types of investors — whether seasoned bargain hunters, affluent, millennials, and market newbies, can potentially build their wealth by investing in REIT. REITs are required by law to maintain a 33% public float (the portion of the company owned by the investing public) and to distribute at least 90% of their taxable income to shareholders every year in the form of dividends. In the first quarter of 2021, retail or individual investors accounted for more than 45% of the market turnover. REITs offer them exposure to the real estate sector and ongoing long-term income, no matter their investing goals. “REITs allow the democratization of wealth,” said Atty. Lim.
4. The game is in diversification. Given the range of assets mentioned above, REITs allow investors to buy into various industries as well as REIT classes. Investors can put their money on REITs focused on the office leasing business, which remains in huge demand amidst the pandemic, or those specializing in mortgages. There is a wide array of projects to choose from, and the REIT stock price may increase with growing real estate demand, increased property value, or intense development in the location.
5. REIT issuers are well-regulated. Before a company can issue a REIT in the Philippines, it must go through intense regulatory scrutiny. After filing an application and getting the green light from the Securities and Exchange Commission (SEC), the REIT must be listed on the Philippine Stock Exchange (PSE) and have a minimum paid-up capital of P300 million.
6. REITs create a multiplier effect on the property sector. REITs must plow back the IPO proceeds to related development projects, and this reinvestment can spark activity in the property sector. Under the law, at least 75% of the REIT’s total assets must be invested in income-generating real estate. They may invest in similar assets offshore but not exceeding 40% of their total asset value. “REITs help build a more vibrant capital market and spur infrastructure development,” added Atty. Lim.
7. Investing in REITs also comes with risks. Like any other investment, REITs are not immune to external factors such as the movement of interest rates, disrupted or waning tenancy and other industry hiccups translating to lower revenue, and changes in regulatory or fiscal policies, to name a few. This is why it’s important to choose your REIT wisely. Your REIT of choice must have a growing, high-income, and high-quality portfolio and are issued by highly reputable and well-managed companies with a steady track record.
8. REIT has some tax perks. Under the Tax Reform for Acceleration and Inclusion (TRAIN), the transfer of property to a REIT in exchange for its shares is exempt from the 12% VAT. This perk can be enjoyed if the REIT acquires at least 51% of the outstanding voting capital stocks of the transferee. Also, the tax on dividends that investors receive may vary: some may be taxed as part of ordinary income, while others are subject to a lower tax rate. REITs are also subject to tax hikes on properties that are imposed, both locally and nationally.
9. REITs help the economy bounce back better. REITs help the economy recover from economic slump by enabling issuing companies to shore up capital and fund their business growth, and allowing Filipinos to channel their savings to investment. “We envisioned the REIT law not only for investors, but from the standpoint that it will be key to develop the capital markets,” said Atty. Lim.
10. REITs get a boost from BPOs. The fast-recovering, continually growing, and resilient IT-BPO sector is seen as a boon to REITs that have an office leasing portfolio. “The more vibrant the BPO industry is, the higher the chances are for office buildings to have a
regular income stream,” said Atty. Lim. According to a study conducted by Everest Group for the IT & Business Process Association of the Philippines (IT-BPAP) in December 2020, the IT-BPM industry is expected to achieve a revenue growth of between 3.2% to 5.5% per annum in the next two years.
Among the upcoming REIT issues, FLI has one of the longest track records in leasing office spaces to BPOs, being one of the pioneers. CPI filed a registration statement for its IPO with the SEC last March 25, 2021. CPI has submitted an application with the Securities and Exchange Commission (SEC) to change its name to Filinvest REIT Corp. (FILRT). FILRT will own and operate a portfolio consisting of 16 office buildings clustered in the 18.7-hectare Northgate Cyberzone, a Philippine Economic Zone Authority (PEZA) Special Economic Zone in Filinvest City in Alabang, Muntinlupa; and one office tower with a retail component in Cebu Cyberzone, also an economic zone in Lahug, Cebu City. These properties have a total gross leasable area (GLA) of 301,362 square meters.
Amidst the global pandemic, CPI was able to sustain its revenues primarily from its office leasing business, which increased by 8% to P3.12 billion in 2020 compared with the previous year. In the past 10 years, revenues from this market segment have steadily given CPI a steady cashflow, with a compounded annual growth rate of 20%. “The BPO sector affords steady cashflow for our office leasing business, thanks to the resilience of the country’s BPO sector,” said CPI President and CEO Maricel Brion-Lirio.