REITs: The Next Investments to Watch Out for In PH
by Rebecca Matias
Once REITs hit the Philippine market, they can be a great way for Filipinos abroad to invest in the country’s booming real estate sector.
Whether it’s optimism, nostalgia, or just plain practicality, a growing number of Pinoys from all over the world are now turning their gaze homeward in search of lucrative real estate opportunities. In the UAE, for instance, as much as 8 in 10 Filipinos working there say they’re planning to park some of their money in the Philippine property market, while Filipino immigrants living in Vancouver for over 30 years are busy shopping for housing investments back home.
It’s clear that a huge chunk of demand for Philippine real estate comes from Filipinos abroad. The World Bank estimates that 60% of the $26.9 billion in total cash sent home by OFWs last year went directly or indirectly to real estate. Expats have become such keen property buyers that, in some areas in Visayas and Mindanao, they account for 60% of demand, particularly for low-end to medium-range residential units.
All this makes overseas Filipinos an appealing segment for the country’s property developers, most of which now directly reach out to potential buyers abroad. In many Filipino communities overseas, property offers and promotions from companies like Ayala Land, Megaworld, 8990 Holdings, and others are hard to miss.
These packages include residential condominiums and town houses, which continue to be top choices as investments in the rental market, as well as “condotels” (condominium units pooled as hotels and rented out to short-term guests),which are usually touted as hassle-free rental property investments.
Still, despite seeing plenty of attractive investment opportunities, not all interested overseas Pinoys are ready buyers. Some cite the sheer amount of work involved (such as doing due diligence, processing the required paperwork, dealing with tenants, carrying out maintenance, etc.) as a factor. Others simply admit they neither have the risk appetite nor the bank balance to invest in real estate.
This is where a real estate investment trust (REIT) comes in handy. A REIT makes it easier for people who don’t have the time, expertise, or capital to gain exposure in property investments. A REIT is a company formed solely to own income-generating real estate assets. REITs resemble mutual funds in that they pool money from many different investors together. But instead of buying financial assets and securities, REITs invest in commercial property.
Philippine REITs are publicly-traded companies. Their shares are listed in the Philippine Stock Exchange (PSE), although exactly zero REITs are listed at time of writing (more on that below). Owning shares of a REIT means owning part of the underlying property that’s expected to produce income and increase in value throughout the property’s lifespan. Also, like mutual funds, REITs come in different flavors, reflecting the type of real estate investment a trust focuses on.
The main advantage that REITs bring is that they both pay dividends and accrue capital gains. Philippine REITs are required to distribute at least 90% of their income to shareholders each year. Combined with a steady increase in property values, REITs can provide relatively competitive returns to an investor’s portfolio.
Philippine REITs also offer some significant tax advantages, especially for Filipinos abroad. Overseas Filipino REIT investors won’t be paying any dividend taxes for seven years once REIT tax regulations take effect. REITs are entitled to a host of other generous tax incentives so much so that the Department of Finance (DoF) has warned the country stands to lose billions in forgone tax revenues from REITs.
REITs, of course, do have their drawbacks. The requirement to pay out a huge part of their earnings as dividends each year can lead to all sorts of problems. Because there’s lesser profits left to reinvest in the company, a REIT tends to show slower growth. Also, lesser earnings available means a REIT must rely on debt or raise new additional capital for financing.
Meanwhile, the dividend payouts can vary from year to year. Since rental income tends to rise or fall, the amount of required distributions isn’t guaranteed. Plus, there’s always the possibility for property values to fluctuate adversely, so returns can turn volatile.
Still, most advisors recommend that REITs should make up 5% to 15% of an individual’s portfolio. They’re a good way for investors to balance and diversify their holdings.
However, investors looking to buy Philippine REITs may have to wait a little longer. It’s been seven years since the REIT law came into effect, and not a single share of a REIT company has been listed on the PSE.
A lot of Filipinos got excited when the Real Estate Investment Trust Act finally became law in 2009. The country’s top property developers expressed keen interest in setting up REIT companies and waited for regulators to hammer out how the law was going to be implemented. When the Bureau of Internal Revenue (BIR), SEC, and DoF came out with the guidelines, development companies complained the regulations were too restrictive and put their REIT funds on hold.
Now, after years of fits and starts, everyone’s starting to get more optimistic about the prospects for the Philippine REIT market. Developers and regulators have cleared some of the hurdles that stalled earlier negotiations. It may very well be only a matter of time before REITs begin trading on the PSE.
Once Philippine REITs finally become available to investors, it helps to keep a few tips in mind. First, it pays to diversify your REIT holdings. Different REITs specialize in different property segments, so you don’t want to keep all your eggs in one basket. Second, when doing due diligence, you want to look for a solid track record of earnings growth. Since REITs are a new asset class in the Philippines, this information mostly likely isn’t available.
Third, look at how a trust is capitalized. Avoid REITs that rely too much on debt. Next, get to know the management team. Choose trusts maintained by reputable property developers. Lastly, ask your financial advisor about investing in Philippine REITs. You want to be sure these investments align with your financial objectives.