P&A Grant Thornton News

A TRAIN ride for the REIT

Lea Roque Lea Roque

A few days ago, a friend was agonizing over his first-world problem of the day. He wanted to invest in real property but found the whole process of checking titles, dealing with the Bureau of Internal Revenue and the Register of Deeds too stressful and complicated. However, putting his money in fixed-income time deposits will slowly deflate his money’s worth due to the very low yield from this type of investment.

A good compromise would have been to invest in real estate investment trusts, or REITs, which are investments in real property without actually buying a piece of land. After the approval of the REIT Law or Republic Act No. 9856 in 2009, some of the big real estate companies have expressed interest in converting portions of their businesses into REITs, to benefit from the tax incentives and additional market capitalization. The excitement that heralded the law was palpable and various sectors wanted to immediately avail of the promise of the new investment vehicle.

Fast forward to 2018, and we have yet to see REITs actively trading on the stock market.

Yet, despite the very cold reception to the REIT Law for the past nine years, a few rays of hope are beginning to shine through, which may finally signal the onset of REIT in the Philippines. The brightest ray came from the new TRAIN Law, which removed the 12 percent VAT on tax-free exchanges.


Under Philippine laws, a real estate investment trust or REIT is a stock corporation established principally for the purpose of owning income-generating real estate assets. What differentiates REITs from other real estate companies listed on the stock market are the tax breaks specifically granted by the law.

Just like regular corporations, REITs are subject to the 30 percent income tax on its taxable net income. However, unlike regular corporations, only REITs can deduct from its gross income the dividends distributed to shareholders. With 90 percent of the retained earnings required to be distributed as dividends, the corporate income tax liability of the REIT is substantially reduced. A portion of the tax savings is expected to translate to more distributable income to the shareholders, making the REIT presumably a better investment alternative.

Issues inhibiting the development of the Philippine REIT

Despite the excitement during the passage of the REIT Act of 2009, we still have a dearth in the REIT market. Stakeholders have identified reasons why they are reluctant to form a REIT corporation. The primary issues identified were: (a) imposition of the 12 percent value added tax on the transfer of real property to a REIT even if the transfer is a tax-free exchange; (b) imposition of the 67 percent minimum public ownership (MPO) rule; and (c) requirement of an escrow equivalent to corporate income tax breaks, prior to the REIT’s compliance with the 67 percent MPO requirement.

VAT exemption of tax-free exchanges

The TRAIN Law, or the tax reform package 1 law, has been blamed for almost all of the increase in prices in most consumer goods in the market. But one amendment introduced by the TRAIN law may help push the development of the REIT market in the country.
Section 109 of the Tax Code has been amended to include transfers of property under Section 40 (c) (2) of the Tax Code or tax-free exchanges as exempt from value added tax.

With the above amendment of the Tax Code, stakeholders are expecting the BIR to issue the amendment to Section 7 of Revenue Regulations No. 013-2011, which imposed a 12 percent VAT on the transfer of property to the REIT even under tax-free exchange conditions.

The TRAIN amendment directly addresses one of the main reasons cited by property developers as hindrance to forming REIT corporations. With the amendment, property owners can now transfer qualified real property assets to the REIT corporations without incurring the 12 percent value added tax.

Possible decrease in the minimum public ownership requirement
The REIT law provided that the MPO shall not be less than one-third (1/3) of the outstanding capital stock of the REIT. Pursuant to this, the implementing rules and regulations issued by the SEC imposed an MPO equivalent to at least 40 percent of the outstanding capital stock of the REIT in the initial year. This MPO must be increased to 67 percent within three years from listing.

As the Philippine REIT market is still in its infancy stage, the imposition of the 67 percent MPO discouraged real estate holding companies from creating REITs, as it required them not to have majority ownership and control over the REIT. This lack of control and majority interest clearly discouraged the sponsors from contributing their best performing real estate properties into the REIT.

Fortunately, as early as 2016, the SEC has expressed willingness to lower the MPO to 33 percent. With the 12 percent VAT removed by the TRAIN Law, investors are now expecting the SEC to make good on its promise to amend the MPO requirement.

Escrow requirement

Another requirement of the BIR that unnecessarily made setting up a REIT inordinately expensive is the requirement that the income tax waived in the first two years of operation in view of the dividend deduction be put in escrow, to be released only upon showing that the REIT has achieved the required 67 percent MPO within three years from listing. This requirement will needlessly tie up much needed capital of the REIT, which should have been better used in the operations of the REIT.

It is clear that the prohibitive requirements of the regulations that were imposed after the law has been passed have caused the inability of the REIT market to develop in the Philippines. There can be no clearer proof of the detriment of the requirements than the lack of REITs actively trading in the Philippines almost nine years from the time the law has been approved.

Initial sentiment was high and interest from major players has already been signified even during the discussion stage of the law. With the removal of the 12 percent VAT on the transfers of property finally made possible by the TRAIN Law and the promise of the SEC to lower the MPO requirement, promising rays of hope are shining on the REIT market in the Philippines.

The REIT Law granted incentives to the REIT to make the REIT an attractive investment vehicle, with the end in view of democratizing wealth and opportunity. One of the objectives is to enable ordinary investors to benefit from the booming real estate market in the country.

It seems that the regulators and the industry players are finally seeing some positive signs that the stalemate for the past nine years has been broken. Perhaps next time, my friend would have extra investible funds he can readily invest in a REIT instrument of his choice.


As published in The Manila Times, dated 09 March 2018