If you’ve been looking to diversify your investment portfolio, you may have heard something about REITs. Invest in commercial real estate and be paid off as an investor. Sounds good? Here’s what we know so far about REITs in the Philippines.
What are REITs?
A Real Estate Investment Trust or REIT can be a public or privately listed stock corporation which owns properties that generate income.
These properties can be industrial or commercial, like hotels, buildings, malls or commercial spaces. Mortgage loans can also be considered REITs.
Dividends and earnings of the REIT are then distributed to the shareholders as mandated by law.
REITs are much like mutual funds because they pool money from different investors but invest in commercial property instead of securities or financial assets.
Just to give you a brief background, REITs were established during the 1960s in the USA to give investors access to income-generating real estate.
Small investors were given the opportunity to participate in commercial real estate investments that used to be only available to very wealthy individuals or major financial intermediaries.
Because of REITs, you can earn from the property market without shelling out a ton of money that is usually the case when directly purchasing or acquiring a property.
How companies in the Philippines qualify as REITs
Philippine Congress passed the REIT Act, or Republic Act No. 9856, in 2009. Companies in the Philippines can qualify as a REIT by complying with the requirements of the law, some of which include:
- At least 90% net income distribution
- Be listed in the Philippine Stock Exchange
- 70% investment only in real estate or real estate assets, or at least 35% investment of total assets in real estate
- Comply with the Securities and Exchange Commission’s requirement of applicable minimum public ownership
- Not undertaking or participating in activities related to property development or making investments in unlisted property development companies
- Perform a full valuation of REIT every year
How does a REIT make money?
REITs get their capital by initial public offering (IPO). And just like stocks, REITs are managed like a stock portfolio.
The capital raised will allow REITs to purchase, develop, and manage real estate to generate income or profits, 90% of which must be distributed regularly to the shareholders.
Income is generated through REITs by renting out, leasing, or selling properties they purchase.
Why should you invest in REITs?
REITs offer flexibility.
The portfolios offered by REITs have a cheaper or lower investment amount, and buying or selling your shares is also easier.
This makes them accessible for people from different walks of life to invest in real estate.
REITs also make it easier for people who have no expertise, resources, or capital to experience and be exposed to investing in property.
They are financially secure.
When you make an investment in REITs, you can enjoy a stable cash flow. This has to do with liquidity and diversity of the assets, which are good if you’re looking for a long-term investment.
They are low risk.
REITs invest on properties that generate income and will be perfect for people who are looking to have stable passive income.
They pay dividends and accrue capital gains. And just like mutual funds, they come in different types, depending on what the trust decides to focus on.
With the steady increase of values of properties, REITs can give competitive returns to investors.
They also offer tax advantages for overseas Filipino investors as they don’t need to pay dividend taxes for 7 years once REIT tax regulations are in place.
REITs in the Philippines
You may need to wait a little longer if you’re planning on investing in REITs in the Philippines.
Since the REIT Law was passed in 2009, the local market is still struggling to attract REIT listings because of taxation and strict public ownership rules.
However, there have been some good news recently for REITs.
As per the Bureau of Internal Revenue, property transfers into REIT vehicles are now exempt from VAT (Value Added Tax).
The public ownership requirement has also been reduced to 33% from 40%, and will then be raised to 67% on the second year.
After so many stops and starts, prospects for Philippine REITs are starting to look more promising.
It will only be a matter of time before Filipinos can start investing and REITs begin trading in the stock exchange.
Currently, only Ayala Land Incorporated, the Philippines’ largest property developer, is gearing up its REIT offering.
This 2020, Ayala Land hopes to place their prime office assets located in the Makati CBD, which are valued at 500 million USD.
How can you start investing in REITs?
Once REITs finally become available to Philippine investors, you can benefit from keeping these helpful tips in mind:
- Diversify your REIT holdings and invest in various property segments.
- Even if this information is currently unavailable, choose REITs that have a solid track record and are maintained by reputable property developers.
- Also consider how REITs are funded or capitalized. If there is too much debt, you may want to set your sights elsewhere.
- Lastly, if you have questions about REITs, consult a financial advisor with the experience and the expertise to ensure that your investments meet your financial goals.
The Bottom Line
REITs can show slow growth, which means lower earnings. When this happens, REITs will have to rely on debts to raise additional funds for financing.
Dividend payouts can also vary because property values also fluctuate.
However, most financial advisors that you will speak to will recommend that REITs should be a part of your investment portfolio.
Even if it’s just 5% or 15%, they’re a good option if you want a diversified and balanced investment portfolio.
Investments have their risks and rewards. As an investor, you need to find your comfort level and discover an investment strategy that’s right and will prove to be profitable for you.
Do you think REITs are something you’d want to explore in the near future? Let us know in the comments!