The Philippine Stock Exchange prepares to launch real estate investment trusts

The passage of Republic Act No. 9856 in 2009, otherwise known as the Real Estate Investment Trusts (REIT) Law, established the legal and regulatory framework for the development of domestic REITs, and was lauded as a significant step for the Philippines as it catches up with the rest of the world.

The act was passed into law with the view of unlocking real estate value and democratising wealth through public participation from returns of real estate properties. REITs are also seen as a cheaper source of capital for real estate firms, and are expected to mobilise capital, promote economic development, and foster growth in tourism as well as liquidity in the capital markets.

The launch of REITs is expected to boost the development of the equities market by adding another product offering to the Philippine Stock Exchange (PSE). For companies, especially those involved in real estate and other related revenue-generating properties, REITs offer a means through which they can raise capital in the stock market for their funding needs. The introduction of REITs would also attract new investors who prefer steady returns via dividends, while still enjoying potential capital gains from share-price movements.

Almost A Decade-Long Stalemate

To date, no REITs have been listed on the PSE, as legal and administrative requirements have stymied the act’s full implementation. The stock market has been waiting for the issuance of more workable guidelines, because this product will not only add to market liquidity and investor options, but also benefit the growing property sector.

Among ASEAN members, only the Philippines and Vietnam do not have REITs in their markets. Most regional exchanges listed their first REIT more than a decade ago, taking about two years to list a REIT after the enactment of their respective laws. Despite the fact that several local firms have expressed their interest in setting capital aside for REITs – and even establishing REIT corporations – the PSE is headed into its ninth year since the law’s passage without a single REIT listing.

Since the implementing rules and regulations were released, concerns about Philippine REITs have focused on the imposition of value-added tax (VAT) on the transfer of property, escrow obligations to avail of tax incentives and high minimum-public-ownership requirements. While REIT corporations are supposed to benefit from tax considerations, the Bureau of Internal Revenue (BIR) implemented revenue regulations that subject the transfer of property to a 12% VAT. In addition, the BIR required tax savings from dividend distributions to be placed in escrow to ensure compliance with the increase in minimum public ownership as mandated by the Securities and Exchange Commission (SEC). Regulations issued by the SEC in relation to the REIT Act require a REIT company to have 67% minimum public ownership by the third year. This is well above the 33% minimum requirement that the law prescribes, and the highest among markets which have REIT products.

Getting Off The Ground

The PSE has held discussions with both the BIR and SEC on how to get the REIT product off the ground, and regulators have indicated their willingness to review the regulations and exercise greater flexibility in adjusting the current provisions.

In fact, the VAT issue surrounding REITs was included in the slate of reforms made by the government in the Tax Reform for Acceleration and Inclusion (TRAIN) law. In March 2018 the BIR issued a revenue regulation that implemented the VAT provisions under TRAIN and amended the previous VAT rules. One of the provisions indicated that the transfer of assets to REITs are now VAT-exempt, provided it falls within the purview of Section 40(C)(2) of the National Internal Revenue Code, i.e., properties are transferred to a corporation by a person in exchange for stock, as a result of which, said person gains control of said corporation.

The SEC had previously noted that it would be amenable to revisiting the public ownership requirement once the issue on VAT was clarified, so there is greater optimism that the ownership issues will soon be resolved.