Is it time for a Philippine Real Estate Investment Trust (REIT)? Governments around Asia have had REITs since early 2000. Japan and Korea were the pioneers. In just five years, the number of REITs has gone through the roof, from merely five in 2001 to around 80 in 2006. This includes Hong Kong, Malaysia, Singapore, Taiwan and Thailand.
REITs have also been around in countries outside Asia: Australia, Belgium, Bulgaria, Canada, France, Germany, Italy, the Netherlands, New Zealand, South Africa, Turkey, the United Kingdom and the United States (where the concept originated). China, India and Pakistan, on the other hand, are in the process of introducing REITs.
A brief explanation for those unfamiliar with this unique income-oriented asset class: A REIT is a tax designation for a corporation investing in real estate that reduces or eliminates corporate income taxes. In return, REITs must distribute at least 90 percent of their income. A REIT is designed to provide a similar structure for investment in real estate as mutual funds provide for investment in stocks. Like other corporations, REITs can be publicly or privately held. Public REITs may be listed on a public stock exchange, like shares of common stock in other companies.
REITs carry with them manifold benefits. REITs level the playing field for real-estate actors. It does this by allowing small and large investors alike to participate directly in the ownership and financing of large-scale real-estate projects at affordable rates of investment. REITs don’t have the disadvantages of illiquidity, high transaction and management cost, as compared with traditional private real-estate ownership. REITs offer higher yield. While interest rates on savings account are below 1 percent per annum, REITs are paying an average of 5 percent to 9 percent. This is made possible through a steady stream of income from rents. Shareholders enjoy big dividends, as REITS are required to return at least 90 percent of earnings.
REITs also smooth out overall returns, especially during market downturns. They are protected against declining prices of stocks and bonds. Their tangible assets and long-term lease contracts make them one of the most stable companies in the market.
REITs provide steady income to investors and the national government. What’s more, they will encourage strategic foreign investment in the capital market. According to Global Real Estate Investment Trust Report 2008 of Ernst & Young, the total market capitalization of publicly listed REITs around the world reached nearly $605 billion. REITs in Asia have been the best performers, with South Korea first in the rankings. With China’s pilot REIT project set to begin in 2009, there is renewed interest in the public REIT sector in Asia. Take note that Asia is poised to overtake Europe as the second-largest REIT market in the world. In a few years, it will challenge North America’s No. 1 standing.
Finally, REIT translates to a stable real-estate industry, which, in turn, translates to a stable economy. It is undeniable that the strength or weakness of economic activities in real estate has the capacity to stimulate or dampen economic growth in all areas.
It is for this reason I authored and am sponsoring on the Senate floor a Real Estate Investment Trust Act (REIC). Now is the most opportune time to establish a Philippine REIT. We have a strong real-estate industry driven by the influx of remittances from overseas Filipino workers, the boom of tourism, and the growing number of offshore businesses in the country.
We need REIT to build up our capital markets and help businesses thrive. This will cushion against the crunch in the short term, and strengthen the financial system in the long term. Our neighbors thought globally, and so they reaped globally.
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