The article below is from BusinessWorld May 23-24, 2008 issue, while the ad immediately below is one made for SGX in Singapore:
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What are REITs? When will the Philippines have REITs?
Can we establish a REIT market to compete for foreign capital?
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A security that sells like a stock on the major exchanges and invests in real estate directly, either through properties or mortgages.
REITs receive special tax considerations and typically offer investors high yields, as well as a highly liquid method of investing in real estate.
Equity REITs: Equity REITs invest in and own properties (thus responsible for the equity or value of their real estate assets). Their revenues come principally from their properties' rents.
Mortgage REITs: Mortgage REITs deal in investment and ownership of property mortgages. These REITs loan money for mortgages to owners of real estate, or purchase existing mortgages or mortgage-backed securities. Their revenues are generated primarily by the interest that they earn on the mortgage loans.
Hybrid REITs: Hybrid REITs combine the investment strategies of equity REITs and mortgage REITs by investing in both properties and mortgages.
From: Investopedia
REIT stands for Real Estate Investment Trust. It's a cheap way of buying into something that has the characteristics of real estate which is why it's quite ubiquitous.
When will the Philippines have REITs? My guess is not until the draft bill is revised to give the government and non-real estate sectors some immediately tangible benefit upon the establishment of a REIT. The Angara REIT bill was tabled at the Senate since July last year, and not much progress has been made since.
The Angara bill (as of Feb 2008) gives a lot of incentives to real estate owners to convert their properties to REITs, such as exemption from capital gains tax on transfer, VAT, and so on, and on top of that, allows the same real estate owners to keep at least 50% (even 70% in an earlier draft)of their ownership in the new REIT. Since, under the bill, rental income from REIT properties will be exempt from income/profit tax if over 90% of that income is distributed to REIT shareholders, this last provision alone will mean substantial tax savings for the original property owners.
However, I think the biggest sticking point should be the exemption from capital gains tax on the transfer of properties from the REIT proponent (the real estate owners) to the REIT corporation. In a non REIT situation, if the asset of a company is sold to another company, the seller has to pay a capital gains tax (which, incidentally, is levied whether there is capital gains or not!) at 6% of the sale price of the property, or the government assessed (zonal) value of the property. One can imagine how much savings would be incurred to the real estate owners if this tax is exempted, bearing in mind some assets have appreciated several times in value over the years.
Under the bill, the real estate owners would gain a lot, investors would also be happy to have a new way of investing, and financial sector professionals would earn more fees, but the government would have to wait years to see any benefit to its treasury, and other sectors of the economy would wonder why the real estate sector should get these big fat tax concessions.
Different countries build their REIT structure according to their own needs and circumstances. Apart from the basic structure of distributing rental income to a large number of investors, there is no single one correct model of REIT legislation. However, the impasse of the Philippines' REIT draft legislation may be solved by referring to the UK REIT model.
The one feature of the UK REIT that differs from many other countries' REIT is that their government charges a 2% conversion fee on the properties transferred to a REIT. In exchange, no capital gains tax is levied. If the Philippine REIT model adopts something similar, say cutting the capital gains tax on transfer by half, i.e. 3%, then we can tell the government that they would receive this 3% every time an asset is transferred to a REIT, an income which would most likely not have come about if not for the formation of a REIT, since the real estate owner has the choice of not selling a good quality asset which is generating stable rental income.
This additional revenue to the government can immediately be used to fund urgent investments such as infrastructure and agricultural support systems, thus benefitting the rest of the economy.
Some may argue that this would make the REIT package unattractive to real estate owners. I would say that while this new deal is less attractive than the old deal, it should still be attractive to many real estate owners. No matter how attractive a deal is, there are real estate owners who would prefer not to set up a REIT. It would not be realistic to expect a package that would be attractive to all real estate owners. But any REIT established under the new deal would benefit everyone.
(C.Y. Wong, CFA)
The Philippine economy would be helped significantly by having an active REIT market.
We learned a painful lesson during the 1997 crisis. The illiquid nature of properties and the relatively small size of the middle class of the Philippines caused the problems in the property sector to be deeper and more persistent.
Philippine banks would benefit from having more participants in the property sector.
The Philippine Star today (25 May 2008) reports (in page B3, under Orbitraries) that DOF is giving support to the REIT bill, subject to some amendments to the tax concession proposals. See link :
http://www.philstar.com/index.php?Business&p=49&type=2&sec=27&aid=2008052414
From Businessweek 2004:
Suntec will thus become Singapore's fifth -- and most valuable -- publicly traded REIT, up from none in 2002. That's a sign of how popular REITs have become as investors seek a stake in Southeast Asia's booming property markets.
Six years after Singapore started, the Philippines still has no REIT or REIC law to speak of and the DOF is seeking more time to study the proposal.
One country has gone from 3rd world to 1st. Guess which one.
let's hope the link works this time: Article on 25 May about proposed Philippine REIT law
Thanks CY.
The link works.
Maybe we will finally have REICs sometime in 2008-2009. This will be very helpful to the PSE and the investing public as another investment vehicle, which offers more stability versus common equity, will be offered.
A blog like this is helpful as it records thoughts and discussions for the benefit of the investing public.
We heard there are already more than 100 persons who signed up for this first REIT Seminar!
This REIT Seminar has also attracted the attention of a number of people from the House of Representatives and the Senate.
Looks like this will be one exciting seminar for REITs.
There is a very good article on REIT published in the Space+ Magazine, the official publication of the Chamber of Real Estate and Builders' Association (CREBA). Visit this site:
http://kalambacal.blogspot.com/2007/09/introduction-to-reit.html
As said above the real estate investment trust(reit) are the cheap homes that are available.Foreclosure properties are also homes that are available cheaply. They are available at huge discounts.
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