The rise of REITs

DESPITE the onslaught of the coronavirus disease 2019 (Covid-19) pandemic, which affected global economies, Southeast Asia remains home to some of the growing economies expected to recover the fastest. The region is still considered to be a hotbed for foreign investments. Home to countries including Brunei, Cambodia, Indonesia, Laos, Malaysia and the Philippines, economic experts and analysts see great potential for the region to become an economic powerhouse in Asia despite the setbacks brought by the health crisis.

The industry that Southeast Asia particularly excels at is digital communications. E-commerce, telecommunications, and technology research and development are among the areas that the region is well-known for around the world. One manifestation is the boom of online platforms during the pandemic as businesses cater to increased consumer demand in the Southeast Asian retail market.

The region has a fast-developing real estate and property industry brimming with opportunities despite strict legal constraints and health restrictions due to the pandemic. In fact, there are ongoing efforts from Southeast Asian governments to approve and enhance existing legislations on real estate and property laws. One developing aspect of the property market are REITs (real estate investment trusts). REITs are companies that own or finance income-producing real estate across a range of property sectors. These real estate companies are required to meet certain requirements set by regulators to qualify as REITs. Most of these firms trade on major stock exchanges and offer various benefits to investors.

REITs in Southeast Asia

Singapore is currently leading the trading of REITs in Southeast Asia,as the country has established itself as a hub for these companies for two decades with over 42 listed REITs.

Although the Singaporean REITs market suffered an initial blow because of the effects of the Covid-19 outbreak, it has recently reopened to resume global expansion. Another Southeast Asian country with an established REIT market is Indonesia, which currently has three listed REITs. Its REIT industry is obviously still very young compared to Singapore’s, as Indonesian legislators have yet to attract more entities by offering attractive investments.

REITs in the Philippines

Like Indonesia, the Philippines has just established its REITs market even though the government has approved the REIT law over a decade ago. When the law was approved, companies were hesitant to dabble in the REITs industry due to high friction costs, minimum public ownership requirements and high taxes. In an attempt to revitalize the market, the current administration amended the implementing rules and tax laws to help companies in their REIT formation and consequently, to boost the REITs sector.

For a company to qualify as an REIT in the Philippines, at least 75 percent of deposited property must be income-generating and at least 90 percent of distributable income must be paid out as cash dividends to investors. The company must also be listed in the Philippine Stock Exchange. This new regulatory framework was created to fit current realities at the Philippine property industry and to attract capable real estate companies.

Infusing fresh stimulus to the old framework led to companies becoming more confident in rolling out investments. The first REIT under Ayala Land was listed in 2020, while the second REIT under Double Dragon debuted at the Philippine Stock Exchange this month. Subsequently, there are reports of other leading real estate companies planning to list their REITs on the Philippine Stock Exchange. These REIT listings give business experts hope, as REITs are seen as one of the catalysts for recovery and growth of the Philippine economy.

Opportunities for companies and investors

REITs are usually made up of income-generating properties such as apartments, offices, malls, warehouses and hotels. However, companies that generate income from utilities, toll roads, airports and hospitals can also establish REITs. Among the main incentives for asset owners transferring their income-generating assets to REITs is income tax benefit.

Distributable income paid as cash dividends by REITs are exempted from corporate income tax. This will ultimately increase returns since the Philippines has an income tax rate of 30 percent (25 percent under Create). Besides tax savings, property owners will be able to liquidate the value of their properties, leading to an opportunity to raise capital that can be used for other investment opportunities.

On the flipside, investors should consider buying REITs since they offer passive income outside of conventional financial products such as time deposits or bonds. The dividend yields of REITs are also mostly higher compared to the yields of time deposits and bonds. Moreover, some of the benefits REIT investors can enjoy is owning income-generating assets without the need to shell out huge capital. Some of these assets include rental escalation or tariff hikes, higher occupancy rates or growing demand, capital appreciation, leverage and diversification.

Because REITs are publicly listed and traded, they are liquid and are easily sold. This makes it unique from physical investments, venture capital and private investments, where there are binding contracts and guidelines that must be followed.

Future of the property market

It is only a matter of time before we see significant progress in the property sector. Even with the pandemic affecting the industry, experts are still optimistic on recovery and expansion. Several mergers and consolidations are also projected to further stabilize the sector. Although we anticipate more companies establishing REITs, government regulators can start driving attraction by actively amplifying and improving the benefits that come with it. Monitoring the property market and being aware of key players, as well as seeking advice from credible business advisors will also help investors make more informed decisions.

If real estate and property companies play their cards right in establishing REITs, the Philippines can anticipate faster economic recovery. Business experts predict that infrastructure investments will be the primary force that will drive economic recovery. REIT investments have the potential to generate large amounts of capital,which will fund more real estate projects that can help usher long term growth. Private entities and government regulators must work together to help unlock the potential of REITs for the future of the Philippine economy.

Atty. Lea Roque is a principal for Tax Advisory and Compliance at P&A Grant Thornton. P&A Grant Thornton is one of the leading audit, tax, advisory and outsourcing firms in the Philippines with 23 partners and more than 900 staff members. We’d like to hear from you! Tweet us: @GrantThorntonPH, like us on Facebook: P&A Grant Thornton, and email your comments to anton.ng@ph.gt.com or pagrantthornton@ph.gt.com. For more information, visit our website: www.grantthornton.com.ph

As published in The Manila Times, dated 31 March 2021