The REIT thing at the right time

A REIT — or Real Estate Investment Trust — is a 33%-publicly owned listed company which uses pooled funds of investors to purchase, lease, re-sell, and manage income-generating real estate assets such as malls, offices, condominiums, warehouses, and other infrastructure. The REIT Law of 2009 that formally established the REITs is meant to help develop and democratize the capital markets, with prospects for even the small investors to earn regular income and long-term capital appreciation, much like participating in mutual funds.

You don’t have to buy the real estate, pay the real property taxes (and association dues if any), hope for rental streams, and pray for a buyer when you want to sell a property. Just buy into a REIT company (through the Stock Exchange) and you can do without ifs and buts, because the REIT company is obliged by law to pay out 90% of net income as dividends — and that goes to you, no tax on dividends, no Value Added Tax (VAT), and no transaction taxes.

That seems rosy for you, the investor. Then why has REIT investing been withheld from the public even until now, ten years after Republic Act No. 9856, “The REIT Law,” when the Implementing Rules and Regulations (IRR) were approved by the Securities and Exchange Commission (SEC) on May 13, 2010?

The very generous tax incentives for the REIT companies were perhaps the main reason for the hesitancy of the SEC, the Department of Finance (DoF), and the Bureau of Internal Revenue (BIR) during the administration of President Benigno S.C. Aquino III to award such gallant opportunities to the real property development sector when there already was a property boom that we now know has sturdily lasted these past 10 years. The DoF wanted to temper the estimated revenue losses of P3.7 billion a year that would be incurred from the implementation of the REIT Act in the IRR’s original interpretation. Conflicts of interest issues bothered the Finance group, but eventually the corporate separateness of big real estate development companies with their property management subsidiaries blurred in subsequent definitions of eligibility to do REIT. Eventually, the SEC offered a compromise of a 33% public float versus the proposed 40% required float.

Early on, Megaworld Corp., DoubleDragon Properties Corp., and Robinsons Land Corp. expressed interest in doing REITs. But why did they banish the thought? REITs must have a minimum paid-up capital of P300 million, with 1,000 public shareholders having at least 50 shares each. Sigh. And the REIT Law slept through the change in administration to that of President Rodrigo Duterte in June 2016. Then the new DoF became busy with its “Tax Reform for Acceleration and Inclusion” (TRAIN Law) and launched an aggressive “Build, build, build” program to pump-prime the economy.

Three years into “Build, build, build” and a steady GDP growth bolstered by a BBB+ credit rating, the real estate development, construction, and related industries are booming. And in this glorious setting, the REIT concept, with its generous subsidies, was reinvigorated — with the expression by Ayala Land to raise $500 million (P26.25 billion) as it prepares to participate in the erstwhile unappreciated REIT (“Ayala Land files first real estate investment trust listing,” Philippine Star, April 24, 2019). Ayala Land, a real estate division of Ayala Corp., is one of the largest developers in the land, with a net income attributable to parent of P29.2 billion in 2018 according to the company’s annual report.

At the Banco de Oro (BDO) Global Feeder Funds Forum last week, a segment of the forum offered investor participation in a developed markets property index fund totally invested in global REITs. A cumulative performance of 15.29% for three years of the target fund can be expected. Global real estate securities, in general offering 3.5 to 4% dividend yield, forecast earnings growth of 5% per annum. But why invest globally, when the Philippines needs all the financial resources for its hyped-up infrastructure development projects?

In a summary of 2019 macro forecasts, actual GDP growth of 6.2% will go down to 6% or a little lower. The BSP Policy Rate will be cut to 4.2% to 4.7%, vis-à-vis the 10-year Peso GS yield which will likewise be going down from 7.07% to 5.5-6.0%, to tame inflation from 5.2% in 2018 to 3.2% expected at end 2019. The peso will go down from P52.72 to P54 to the US dollar. Short term net yields on investments will stay in the areas of 3%, hardly covering inflation. The PSE Index will pull up from 7,466 to 8,300, assuming returning confidence in equities.

Impliedly, this anxious scenario is why the forum recommended that investors look at the more reliable global markets. Here, will the local REITs be the Avengers, in this noble war for financial inclusion and acceleration?

But financial inclusion may not come hand in hand with intended economic acceleration, and may have to be slowed to push that obsessive desire to “go, go, go” to the peak of what our country can be. The poor will always have their entitlements, but what about the middle class? Real financial inclusion must include the middle class, who must at least keep marching in place lest they be left behind in the reallocation of socio-economic status.

Unfortunately, it looks like the REIT will give added (and unsolicited) financial advantage in terms of superfluous subsidies to big businesses much more than the middle class investor can hope for as promised in the REIT plan of distributing 90% dividends after deducting all costs of operations — can you imagine the “flexibility” of the REIT company? And this is rewarded by the lowering of their corporate income tax on just the 10% remaining income.

What will now happen to my small rental business, a widow asks? I bought my condos at “pre-selling” from the developers, meaning they used my money to build the units I bought, and now their REITs are again taking advance money from the people for rental and property management of developments that were financed in advance by that “pre-selling.” Direct rentals will struggle like the small Mom-and-Pop stores that suffer thin margins to price themselves cheaper than the big businesses that enjoy advances from the public, economies of scale in production and operations, and, for the REITs, the subsidies. And what about the real estate brokerage industry? We will have to make do with the small retail says, a sad broker cries.

Location, location, location — they say of real property valuation and rentals or sales. REITs will create their own favored location, a “community,” which will draw buyers or renters to them. These choice locations can scatter around the country, and land banking by big developers has assured perpetual control, strengthened by the REIT entrenchment, to keep their property interesting and in demand always. There are so many developments, not only residential units. Malls are expected to add 250,000-square meters of space this year (The Philippine Star, Feb 1, 2019).

Is REIT the right thing at this time, for financial inclusion and economic acceleration?

Amelia H. C. Ylagan is a Doctor of Business Administration from the University of the Philippines.

ahcylagan@yahoo.com