Philippine REIT Market Brief
Despite the economic impact the pandemic brought, the first successful listing of a real estate investment trust (Ayala’s AREIT) last 2020 paved the way for other large corporations to have enough confidence to expand their portfolio. According to the statement of Philippine Stock Exchange Inc. President and Chief Executive Ramon Monzon, at least three companies will go public, and four real estate firms will issue REIT offerings this year.
Following the initial listing came DoubleDragon (DDMPR), the first company this year to successfully debut in the local stock market on March 24, with an initial REIT public offering (IPO) worth up to P14.7 billion: the largest REIT issuance in the Philippines to date. DDMPR’s portfolio includes six completed office towers with retail components in the DoubleDragon Meridian Park. In addition, this REIT has freehold ownership of DoubleDragon’s most valuable property–its 4.75-hectare prime commercial land in the Bay Area, where these six office towers are situated.
In the same month of March, Filinvest Land Inc. filed an application with the Securities and Exchange Commission (SEC) for a REIT offering. In the registration statement, Filinvest REIT Corp., formerly Cyberzone Properties Inc., said that it would offer for sale at least 1.63 billion common shares at a price of P8.30 apiece. The total amount to be raised is P14.9 billion, which is more than the amounts raised by DDMP REIT and AREIT, combined. Its asset portfolio consists of 16 office towers including those leased to traditional and multinational business processing outsourcing (BPO) firms. Northgate Cyberzone in Filinvest City, Alabang, and Filinvest Cyberzone Cebu in Cebu City are the locations of the said office buildings. If the regulatory bodies approve CPI’s REIT IPO plan under Filinvest REIT Corp., it will be the country’s third REIT listing and the second REIT offering this year.
Meanwhile, Robinsons Land Corp., through its subsidiary, RL Commercial REIT Inc., filed a registration statement with the SEC for the public offering of 3,342,864,000 common shares priced at P7.31 apiece, with an over-allotment option of 305,103,000 common shares. RLC REIT is looking to raise up to P26.67 billion to fund its real estate projects in the country as part of its reinvestment plan. Its commercial’s portfolio consists of 14 real estate assets spread across the Philippines with a total gross leasable area of 425,315 sqm, primarily commercial spaces leased for office and, if necessary, retail purposes. This includes the Exxa-Zeta Towers in Quezon City, Robinsons Summit Center in Makati City, Robinsons Cyberscape Alpha and Robinsons Cyberscape Beta in Pasig City and Robinsons Cybergate Center 2 and 3 in Mandaluyong City.
Megaworld Corp. also plans to launch its own real estate investment trust (REIT) by the second half of 2021, stating that despite the COVID-19 pandemic, it remains optimistic about the country’s property market. Andrew L. Tan’s property firm said that it increased its capital expenditures budget for this year to P36 billion from P27.9 billion, the majority of which, or roughly 76 percent, will be used for the construction of real estate projects. Approximately 24 percent will be allocated for investment properties.
Just recently, property giant SM Prime Holdings Inc. announced plans to launch the possible biggest REIT offering by 2022 with a size of at least $1 billion, allowing the Sy family-led property developer to recycle capital from its mature properties to further expand the real estate empire according to the report of the Philippine Daily inquirer.
Philippine REIT Primer
A Real Estate Investment Trust (REIT) is a stock corporation established primarily for the purpose of allowing public partial ownership of income-generating real estate assets such as apartment buildings, office buildings, medical facilities, hospitals, resorts, highways, warehouses, shopping centers, and railroads and among others. It generates a return for investors through the rental income of the underlying real estate asset, user fees, toll fees, parking fees, or storage fees collected from tenants.
The income tax benefit is one of the primary incentives for asset owners to transfer their income-generating assets to a REIT. Distributable income paid out as cash dividends by REITs, is exempted from corporate income taxes and since the Philippines has a high corporate income tax rate of 30% (25% under CREATE), this represents significant savings that could potentially be used for reinvestment activities. Property owners will be able to monetize the income value of their properties, allowing them to raise capital that can be used to pursue other investment opportunities to increase their inventory.
Retail investors on the other hand, would be able to generate passive income outside of conventional financial products like time deposits and bonds. REIT dividend yields are typically higher than time and bond deposit yields as investors are entitled to receive 90% of distributed income annually.
Furthermore, one of the advantages REIT investors can enjoy is the ability to own income-generating assets without needing to buy properties or invest a large amount of capital. The price of a REIT stock can rise due to increasing asset value, development around the location of assets, as well as rising demand and occupancy rates. The diversification provided by REITs can help investors manage risk as they can invest in a wide range of real estate properties at low cost. REITs are also fairly liquid as they can be easily converted to cash because they are publicly listed and traded.
There are a few factors that investors should consider when deciding on a REIT to invest in. The location of the properties is an important consideration as the value of real estate varies depending on where it is located. It is also important to be aware of the government’s planned infrastructure projects in order to determine which properties stand to appreciate in the future.
Another important factor to consider is the issuing real estate company’s track record and credibility. Revenue growth and financial strength boost the company’s confidence. Credibility is enhanced if previous real estate projects have performed well in terms of capital appreciation and rental income appreciation.
REIT Law
The legal framework for REITs in the Philippines has been in effect since 2009 through the Real Estate Investment Trust Act of 2009. However, some provisions in the law such as the requirement to have at least 40 percent public ownership, increasing to 67 percent within three years of listing, and the transfer of assets being subjected to VAT under the original Enforcement Rules and Regulations (IRR), failed to entice real estate companies to participate.
Finally, in January 2020, the Securities and Exchange Commission lowered the minimum public ownership requirement in the first year of listing from 40 percent to 33 percent. The Bureau of Internal Revenue also recently made asset transfers VAT-exempt, provided that the REIT acquires at least 51 percent of the transferee’s outstanding voting capital stocks.
“At this particular time in our history, REITs are indispensable to rebuilding a strong and truly inclusive economy for our people. These will make available huge volumes of capital to our financial system that will help fund our long term growth,” Finance Secretary Carlos Dominguez III said in a statement.
REIT investments have the potential to generate large amounts of capital that can be used to fund more competitive real estate projects as well as renovating existing ones – resulting in higher rental rates, thousands of jobs, favorable dividend rates and capital appreciation.
Observing the developments in the real estate space, being aware of key players, as well as seeking advice from reliable business advisors, will help potential investors in making strategic decisions. In addition, industry experts and professional services such as asset valuation, asset management, market research and consulting, will become necessary to unlock the value of assets and determine the potential of real estate properties.
Indeed, the listing of real estate corporations into REITs will play an important role in reviving the Philippine economy after the negative impacts of the pandemic.
Written by: Mary Grace Ladringan and Angelo Gandia
Aviso Valuation and Advisory Corp. is a real estate consultancy firm that offers valuation and business advisory services compliant to international standards such as the International Valuation Standards (IVS) and International Financial Reporting Standards (IFRS). To assure that we only produce high-quality deliverables, as needed, we do tasks beyond the usual appraisal process like verifying pertinent property documents (i.e. land titles, tax declarations, etc.) with the appropriate government agencies for due diligence purposes prior to the acquisition of the properties.
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References:
https://business.inquirer.net/318759/doubledragon-reit-kicks-off-2021-ipo-season
https://www.bworldonline.com/filinvest-land-to-transform-unit-into-reit/
https://www.manilatimes.net/2021/03/31/business/columnists-business/the-rise-of-reits/857772/
https://www.bworldonline.com/the-reit-thing-at-the-right-time/
https://business.inquirer.net/290646/why-buy-reits
https://businessmirror.com.ph/2020/06/16/tips-on-real-estate-investment-trusts/
https://www.pna.gov.ph/articles/1134680
https://www.pna.gov.ph/articles/1112152
https://www.philstar.com/business/2021/02/15/2077708/pse-expects-7-new-listings
https://business.inquirer.net/320153/filinvests-reit-headed-for-p14-9-b-public-debut
https://www.bworldonline.com/robinsons-land-unit-eyes-nearly-p27-billion-in-reit-market-listing/
https://www.bworldonline.com/megaworld-plans-to-offer-reit-by-second-half-of-2021/
