Rules pave way for REITs

By Diane Claire J. Jiao, BusinessWorld THE LOCAL MARKET can expect to see real estate investment trusts (REITs) soon, as the government has approved the tax rules for these corporations. “I have signed the REIT revenue regulations of BIR (Bureau of Internal Revenue). It [sic] should be published in the next day or two,” Finance Secretary Cesar V. Purisima told reporters at the sidelines of the Pilipinas Natin Forum held yesterday at the National Broadcasting Network Studios in Quezon City. Approval of the tax rules, along with the implementing rules and regulations the Securities and Exchange Commission (SEC) released in May, paves the way for investors to establish REITs, stock corporations that pool investor funds to manage real estate assets. This capital market reform has been long-delayed, given that the law governing REITs, Republic Act No. 9856, was enacted into law back in 2009. However, various industry players have cautioned that only a few real estate companies will want to venture into REITs, noting that the prescribed public ownership floor level remains a hurdle for many. According to the SEC, REITs must have a 40% minimum public ownership, increasing to 67% after three years. These are more than the 33.33% float sought by the private sector, but the initial volume is less than the 51% lobbied by the Department of Finance to enable more people to invest in REITs. The government has long been eyeing REITs as a means of deepening the country’s capital markets, since they would enable the wider public to invest in prime properties, while at the same time give real estate firms another source of financing. “The point of REITs is to give the public a chance to invest in prime real estate assets, but not necessarily to make the public own the prime real estate assets,” Marissa Y. Benitez, Colliers International Philippines’ director of valuation, said by phone yesterday. Explaining the challenge posed by the public ownership floor level, Ms. Benitez noted that “companies have been doing a good job running these assets for a long time. It’s their business. And now, they will have to give that up.” Eduardo A. Gana, co-chairman of the Financial Executives of the Philippines’ Capital Markets Development Committee, shared Ms. Benitez’s view. “The minimum public ownership issue is a key consideration for the largest potential REIT issuers, who appear unwilling to dilute their ownership below 60%,” he said via text yesterday. Mr. Gana added that most Asian companies tend to be majority-controlled by insider groups and their affiliates. But he acknowleged that the Finance department’s stand was “not unreasonable.” The tax treatment of REITs is also a stumbling block. Specifically, the private sector has been fighting for value-added tax (VAT) exemption of the initial transfer of properties to REIT vehicles. BIR Commissioner Kim S. Jacinto-Henares -- who had prepared the tax rules -- confirmed via text yesterday that REITs are not entitled to VAT exemption. To be sure, these ventures are entitled to other perks. For one, since firms involved are required to pay shareholders 90% of their distributable income as dividends, only the balance will be subject to the 30% income tax. Ms. Benitez argued, though, that these tax breaks weren’t enough. “The VAT is still 12%,” she noted. “That’s a big cost that negates all other incentives.” As a result, not a lot of investors will likely be interested in setting up REITs, she claimed. This view was echoed by Eduardo V. Francisco, president of BDO Capital & Investment Corp., who noted via text that “big real estate developers don’t seem inclined at the moment.” Property giants that have expressed interest in REITs include SM Prime Holdings, Inc., Ayala Land, Inc., and Gokongwei-led Robinsons Land Corp. Small real estate companies may venture into REITs, since they will have a smaller tax burden, Mr. Francisco noted. But these may not be enough to develop the country’s capital markets, he clarified. Colliers’ Ms. Benitez agreed, saying, “Second-tier companies will see how it goes for first-tier companies. But if first-tier companies don’t venture into REITs, then who will?” 7 Jul 2011