(Last Updated On: October 29, 2022)
Last year the Philippine government have amended the existing requirements for REIT listing the the Philippine stock market. This was approved by the Department of Finance, Securities and Exchange commission, Bureau of Internal Revenue and Philippine Stock Exchange.
It became more attractive for the companies as the rules have been relaxed. Currently there are now 3 REITS listed in the market which includes Ayala Land REIT, Double Dragon Meridian Park REIT and FILINVEST Land REIT.
Upcoming REITs include Robinson land commercial REIT and Megaworld REIT.
In 2019, the REIT law in the Philippines requires 67% public ownership, this means that companies will hold less percentage of the assets which is not advantageous to any business owner. Second tax transaction is at 12% which is very high so if the company will list a 20Billion company, it will be tax 240Million at once.
For 2020, the public ownership was reduce to 33% and there will be no more tax if the companies will list the stocks under REIT. This paved the way for the REIT listing of several companies
1. What are REITs?
Real Estate Investment Trusts or REIT is one of the vehicle utilize by a publicly listed company to generate fresh source of capital for future expansion of their businesses. It involves listing of assets mainly from mature source that is already generating an income to the Philippine stock exchange.
For REIT this means Real estate assets or investments that generates income mainly from Rentals from tenants of the buildings.
Several REIT companies from the well know property sector of the market have already infused their assets and most of them are successful as mentioned above.
To get investments from institutions and retailers like us, the REIT or REITs will conduct what we call an Initial public offering or IPO and will have to enlist at least 30% of the company shares to the public stock exchange so we can buy shares from them.
For example, SM Prime Holdings is a property developer whose main asset are SM Malls. These malls will get its revenues or income from the renters that are inside it like Jollibee, Tokyo Tokyo, and the like. To get funds from investors, SM Prime holdings will list its company to the Philippine Stock Exchange. Once it is listed on the market, there will be a separate entity that will manage SMPH malls called REIT property managers.
Once the REIT is listed in the stock market, the company will receive the proceeds of the share sells. This cash inflow can be invested again on another venture to expands its business. This can be considered as a one time gain as well so it will be good for the company. So REITs are good option also for this type of companies as it will provide new source of cash.
2. 90% of the Company Earnings will be Distributed
Yes you read it correctly, 90% of the company earnings if listed on REIT will be distributed to individual investors that own shares of the company during the time of earnings. Under normal conditions if SMPH earns income from Rentals, say 20% earnings from previous quarter, it will give back a share or portion of this, may be 1% or 2%, in forms of Dividends so its quite small.
REITs have advantages to offer more to its shareholders with the requirement of giving back 90% of its earnings. With this scenario, dividends that we could get per year would be at least 5%, way higher than the normal 2% that they are giving. Dividends are distributed on a quarter basis or depending on the REIT company preferences.
For small investors like us, you can compare the investment to building a rental house which would entail high initial capital cost, building maintenance or finding renters for the house just to earn monthly from it. The REITs offer the same scenario except any capital amount would be good already and our investment is not at high risk because REITs have their own property managers
3. No Tax for REIT Dividends
There will be no more government tax for for REITs. Government did provide incentive for REIT investors with this new rule. Normal buying or selling of shares on the stocks market or normal dividends will get tax every time there is a transaction done. Especially for dividends, tax rate is at 10%.
Check the Withholding tax of 10% on the above sample
4. How do we earn from investing on this REIT companies
In the Philippine context, Ayaland REIT or AREIT was the first of the reits to list in the Philippine market and investors who up to now bought shares of the company have enjoyed the price appreciation and dividends that comes every quarter starting from its listing date. In addition its stock Price have risen significantly after just few months of listing in the stock market. It is now up by more than 40%
For this type of earnings, this is what we call as price Appreciation which we have discussed on one of our articles. You will earn if you buy at a price and then over time because of good stock fundamentals, the price moves up accordingly
5. REIT Returns on Investment
As you can see now from the different list of companies that is currently listed on Philippine stock market, nominal Dividends per year from REIT is at 5% which is much higher than bank interest rates of 1% or government bonds of 1-3% only. You could get more investing on REITS
Additional Requirements For companies listing on REIT
The government has laid out its rules so that companies enlisting on REIT can continue providing good income for investors have been listed below