New Doors Opening Up

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The Philippines real estate industry will soon have a new avenue for raising funds, with regulations about to be finalised to allow firms to establish real estate investment trusts (REITs), a move that is expected to see an influx of capital into the sector and trigger a wave of new projects.

In late April, the Securities and Exchange Commission (SEC) unveiled the draft of its implementing rules and regulations governing the setting up of REITs, with the final version of the document scheduled for release before June. Late last year, the parliament approved legislation allowing the establishment of real estate trusts, schemes that allow companies to publicly list their income-generating assets.

Under the regulations, a REIT is defined as a stock corporation owning income-generating real estate assets, which must be listed on the stock exchange and boast a minimum of $6.6m in capital. It is also required to have at least 1000 shareholders, each of which must have a minimum of 50 shares, and who between them own 33% of the trust's outstanding shares. Managers of a REIT will be required to distribute 90% of the trust's income to shareholders as dividends annually.

The SEC's draft sets out that a REIT may invest in real estate located in the Philippines, whether freehold or leasehold. At least 75% of the deposited property of the trust must be invested in, or consist of, income-generating real estate.

According to the SEC, REITs will "promote the development of the capital market and democratise wealth by broadening the participation of Filipinos in the ownership of real estate in the Philippines".

At least two major property developers are looking to cash in quickly when REITs become a capital raising option, with SM Prime Holdings, the country's largest mall operator, and Ayala Land Incorporated (ALI) both having unveiled plans to launch real-estate-backed investment trusts valued at $300m or more.

Hans Sy, the president of SM Prime, sees a REIT based on the company's existing assets as having the potential to transform the firm's business model and attract new investors.

"It will potentially allow us to create a capital-efficient, asset-owning vehicle and acquisition platform to drive our growth and expansion while minimising borrowing activities and related costs," he told local media on April 28.

SM Prime is considering rolling between 15 and 18 of the 36 shopping malls it operates in the Philippines into a REIT that would be listed on the stock exchange by the second half of the year, company officials announced in late April.

Jaime Ysmael, the chief financial officer of ALI, told media in mid-April that the company's first REIT was already in the planning stage, with potential assets for an offering being identified by financial adviser JP Morgan. Funds generated would be used to strengthen ALI's leasing operations, he said.

"We were advised that $300m is the minimum size that will make it a successful issue for ALI," said Ysmael. "We will make sure that we pick the right assets and identify a clear growth strategy since REIT depends on the growth story."

Though welcomed by the real estate industry, the law enabling the establishment of REITs has its detractors. The Department of Finance (DoF) advised President Gloria Macapagal-Arroyo to veto the bill on the grounds that in its existing form tax revenues from real estate developments held by such trusts would fall. With the head of state neither vetoing the bill nor ratifying it within the 30-day period set out in the constitution, the law was deemed to have come into force at the end of last year.

Among the measures in the legislation the department objected to were provisions giving REIT firms an open-ended preferential income-tax treatment and exempting migrant Filipino workers investing in the REIT industry from dividend tax for up to seven years.

However, Francis Lim, then-president of the Philippine Stock Exchange, said at the time the legislation came into force that tax revenues could in fact grow as a result of increased business opportunities.

"The perceived tax revenue loss is more imaginary than real. There is at present no REIT industry to speak of. Without a REIT law put into place, there will be no REIT transactions and therefore no tax revenues," Lim said at the end of December.

Although it remains undetermined whether the DoF's concerns will be borne out, what does appear to be assured is that the real estate industry will be looking to take advantage of the new funding stream to step up its activities and build for the future.

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