An REIT is a corporation that lets you invest directly in actual, finished and operational real estate assets that already earn money. Aside from residential and commercial properties like offices, hotels, malls, and condominiums, these can even include infrastructure projects such as toll roads and powerplants.
You can invest in REITs by buying shares, which will allow you to receive dividends. In the Philippines, RA 9856 (known as the REIT Act) requires these funds to distribute at least 90 percent of their earnings as dividends.
While this act was established in 2009, it was only in 2020 when local companies began creating REITs. This is because of several factors, including the 2018 TRAIN Act, which brought some favorable changes to how things could be implemented.
The official guidelines for REITs require, at minimum, public ownership of 33 percent and paid-up capital of P300 million. The transfer of real property into an REIT will not be taxed, but the proceeds from an REIT listing must be reinvested in a real estate or infrastructure project in the Philippines within 12 months.
REITs are like mutual funds in the sense that they both pool and invest the money of different people in order to create profit. The major difference between these two investment types is that REITs own only real estate properties, while mutual funds can contain stocks, bonds and other asset classes.
Advantages for investors
Interest in REITs in the Philippines is growing, because would-be investors are seeing their potential.
Locally, demand for property remains strong (just look at the number of residential and retail developments being put up). In fact, these have reached outside Metro Manila and are already in several provinces around the country.
This demand is directly related to the dividend distribution; if the properties that the REIT owns keep making money, the investors will also continue to benefit. Plus, the value of the shares may rise beyond the initial price, so you might get capital appreciation too.
The strong presence of POGO (Philippine Offshore Gaming Operator) companies, each of which is required to have an office measuring at least 10,000 square meters can be another advantage. The employees of these POGOs require housing, fueling growth even more. Keep in mind, though, that this sector is subject to scrutiny and regulations that may have a big impact on their operations in the future.
For individual Filipino investors who are in the country, the cash or property dividends of an REIT are subject to a 10 percent tax.
Should you invest in an REIT?
REIT is a brand-new asset class, the first of its kind. While there are no sure wins in investing and all types of investment have a certain degree of risk, there is no doubt that the excitement and hype around this product, not to mention its potential, make it something to consider.
Before investing in an REIT (or any product, for that matter), always make sure to check your goals, risk profile and time horizon to make sure that the investment you’re considering is a good match. It is also very important to research on the pros and cons of any investment outlet that you’re interested in, so you are confident that you are making a sound and informed investment decision.
Ayala Land (through its subsidiary, AREIT) has filed a REIT offering with the SEC, or Securities and Exchange Commission. If approved, this will be the first REIT offering available in the Philippines, and will make shares available to the public through the Philippine Stock Exchange.
Other real estate developers that have expressed interest in launching their own REIT offerings are Century Properties, Megaworld and the SM Group.
One thing to note: when investing in REITs, you can diversify by choosing a variety of real estate property types (residential, commercial, BPO, POGO, infrastructure, etc.). While these are all still within one industry, going with different kinds means that your income stream will not come exclusively from one source.