Philippines ripe for real estate investment trusts — experts

EXPERTS ADVISED property developers to put up real estate investment trusts (REITs) now that inflation is stable and there are no firms going public, claiming investors would benefit from higher yields.

But while industry players gathered for a conference on REITs in Makati City yesterday, the government’s financial chief said his department would take time to study the proposed tax rules as the new investment vehicle would result in lower collections and an even bigger government budget deficit.

A bill granting tax perks to REIT firms, which will pool in-come-generating property assets and raise money by listing on the stock exchange, lapsed into law last December but has yet to be implemented because REIT tax rules have yet to be cleared by the Bureau of Internal Revenue.

“The REIT is the proverbial gold mine and the time has come,” Francisco C. Sebastian, president of First Metro Investment Corp., said during the REIT Asia-Pacific Philippines Summit 2010. “The REIT will enable savings to be channeled into productive economic capital.”

But Finance Secretary Cesar V. Purisima, speaking at the joint general membership meeting of the Financial Executives Institute of the Philippines, the Makati Business Club and the Management Association of the Philippines, said the government was looking at tweaking the implementing rules of the REIT law, or Republic Act No. 9856. “My concern is this law can have massive erosion of our revenues,” he said.

Late last month, the PSE approved the listing guidelines for REITs, a month after the Securities and Exchange Commission cleared rules that will implement the REIT law.

Mr. Sebastian said the lack of initial public offerings (IPO) in the local bourse should encourage investors to put money in REIT companies. “Unless we increase the stocks [available], the traded volume will remain limited. REITs will be the IPOs that the Philippine Stock Exchange can expect to increase its business,” he said.

He noted that REITs will offer higher yields than government bonds.

Rick M. Santos, chairman of property consultancy firm CBRE Philippines, said the market should benefit from political stability following a smooth transition of power following the May polls, economic growth of 7.3% in the first quarter, and a large property market.

The office sector, which is being driven by outsourcing outfits, should help boost REITs, he said.

Emerging business districts like the Eastwood City in Quezon City, Robinsons Cybergate in Mandaluyong, and Bonifacio Global City in Taguig provide “opportunities.”

“We like to see the Philippines as the India of Southeast Asia (in terms of business process outsourcing, or BPO)… the quality of labor and service here is so good,” Mr. Santos said.

But Kristine Braden, director for global banking of Citibank, N.A., said property companies should be cautious in including office spaces in a REIT listing. The BPO boom is “cyclical,” she said. “The Philippines might be the flavor of the year, but it is a sector to watch,” she stressed.

Frederick D. Go, president of Robinsons Land Corp., said shopping malls would provide a more stable source of income.

Property giants have expressed interest in acquiring funds through the new investment vehicle. SM Prime Holdings, Inc., the country’s largest mall operator, is looking to raise as much as $600 million through a REIT, while Ayala Land, Inc. wants to raise a minimum $300 million.

One of the tax benefits to be enjoyed by REITs is a 50% discount on documentary stamps for the transfer of real property to REIT companies. The law also exempts from tax any initial public offering and secondary offering of securities.

The Finance department estimates the REIT law to result in P2.7 billion in revenue losses annually.

In a telephone interview yesterday, Internal Revenue Commissioner Kim S. Jacinto-Henares said her agency was still preparing the revenue regulations for the implementation of the law.

“We just want to be more clear on what taxes are covered by the law and who will be exempted. We also want to make sure that there are control mechanisms to make sure that only those entitled get the incentives,” she said.

There is no timetable for the release of the revenue regulations, she said.

Apart from minimizing the impact of the REIT law on state revenues, Mr. Purisima said the government was also looking at focusing on estate tax collections to shore up revenues. He noted that there are about 400,000 deaths recorded per year, but estate tax collections amount to only less than a billion each year. The government aims to collect a total of P1.29 trillion in revenues this year. — N. J. C. Morales and L. D. Desiderio