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PRINCIPLES OF REAL ESTATE

INVESTMENT TRUST

By. Atty. Josh Carol T. Ventura

Nov. 23, 2013

Sacred Heart Center

Prepared by Atty Josh Carol T.

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What is a Real Estate

Investment Trust? Real Estate Investment Trust (REIT) is a stock

corporation established for the purpose of

owning income-generating real property

assets. This include office buildings,

residential buildings, shopping malls, tourism-

related facilities, healthcare facilities, industrial

facilities and infrastructure.


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Investment Trust? Companies which have background in real

estate developments and conglomerates are

the ones who typically establish REITs.

Wikipedia defines it as, “any corporation, trust

or association that acts as an investment

agent specializing in real estate and real

estate mortgages”.


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Investment Trust? REIT allows individuals to invest in non-

residential properties such shopping malls,

hotels, hospitals, and other commercial

properties, it gives them opportunity to

diversify their investment portfolio.


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Investment Trust? This investment is generally great for all

foreign and local investors as this introduces a

different basket to put their eggs on. One of

the great things here is that, as an investor,

you can see how your share is doing by just

visiting the investment itself.


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Investment Trust? You just own a share of the mall, office,

warehouse, hotel or apartment but you don’t

own a tangible item, such as a unit. It’s

different from buying a condominium-hotel

then letting property managers take care of it

while you wait for the income.


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Investment Trust? Simply put, REITs is an investment vehicle where

investors would buy shares/stocks of real estate properties owned by huge developers, then distribute at least 90% of the total profit made by the real estate properties such as shopping malls and hotels through rental or mortgage to the investors. It’s highly liquid; you can convert it into cash in a snap by simply selling it to those interested buyers.


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Investment Trust? Aside from that, it provides the national

government with additional revenue through

income taxes, value-added taxes, stock

transaction taxes, and documentary stamp

taxes


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What is REIT in Summary?

A Real Estate Investment Trust (REIT) is a stock corporation established principally for the purpose of owning income-generating real estate assets such as apartment buildings, office buildings, medical facilities, hospitals, hotels, resorts, highways, warehouses, shopping centers, railroads, among others.

It is a type of investment instrument that provides a return to investors derived from rental income of the underlying real estate asset.


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Origins of REIT

As usual, it started in the US then came to

Asia

Japan pioneered the introduction of REITs in

Asia in 2001

South Korea followed on the same year.


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Origins of REIT

Singapore passed its REIT legislation in 2002

Hong Kong, Taiwan, Thailand and Malaysia

followed the following year.

Among ASEAN countries, we have

Singagpore, Thailand, Malaysia and recently

the Philippines who have REIT legislation


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REIT Trends in Asia

Asian REIT market capitalization grew from

merely $2 billion to a whopping $65 billion as

of December 2009

1997 Asian financial crises accelerated the

development of the development of property

funds


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REIT Trends in Asia

Originally, property funds in Thailand were

intended as vehicle to encourage the

acquisition of distressed properties in the

aftermath of the crisis but it is now used to

raise funds from the public


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REIT Trends in Asia

Originally, property funds in Thailand were

intended as vehicle to encourage the

acquisition of distressed properties in the

aftermath of the crisis but it is now used to

raise funds from the public


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REIT Trends in Asia

In South Korea, REITs were initially used to

promote investment in real estate owned by

corporations and financial institutions in need

of restructuring.


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REIT Trends in Asia

The financial and credit crises that swept the global economy slowed down the growth of the Asian REIT market.

In the first half of 2008, Asian REIT market capitalization suffered its biggest fall ever. The

industry’s market capitalization shrank by almost one third. to $48 billion as its prices fell and new listings dried up.


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REIT Trends in Asia

Nonetheless, Asian REITs rebounded strongly

in 2009, rising by more than 34% as stock

markets in Asia improved and credit became

available following government capital

injections in the banking system


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Table 1. Asian REITs in Asia as of

December 2009 Country No. of Listed REITs REIT Market

Capitalization US$

Million

1. Japan 41 29,473

2. Singapore 21 20,617

3. Hongkong 7 9,521

4. South Korea 3 132

5. Taiwan 8 1,800

6. Thailand 26 1,972

7. Malaysia 12 1,540

Source : CBRE


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REIT Owned Properties in Asia

Segi University,

Malaysia

owned by Amanah Raya

Real Estate Investment

Trust.

Established in 2006,

Amanah Raya REIT

has a diversified

portfolio such as industrial,

office, hotel, educational

institution and retail mall.


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Ascott Makati,

Philippines

Ascott Makati is one of

the serviced residences

operated by Singapore’s

Ascott Residence Trust.

Its portfolio consists

predominantly of

serviced residences,

rental housing properties,

and other hospitality

assets which are located

in key gateway cities


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Citibank Plaza,

Hongkong

, Citibank Plaza, an

iconic structure in HK is

owned by Champion

REIT.

Champion REIT is a

real estate investment

trust formed to own and

invest in office and

commercial properties

located primarily in Asia.


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Tokyu Plaza Omotesando

Harajuku (Omohara), Japan

Situated in a prime

location in Tokyo, this

cutting edge retail

property is owned by

Activia Properties Inc.

This real estate

investment trust is mainly

focused on urban retail

and Tokyo office

properties


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The Real Estate Investment Trust

(REIT) Act of 2009 or RA 9856 The enactment of Republic Act No.9856,

otherwise known as the Real Estate

Investment Trust (REIT) Law, established the

legal and regulatory framework and provided

a favorable market environment for the

development of Philippine REITs.


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(REIT) Act of 2009 or RA 9856 one of the landmark pieces of legislation

approved during the 14th Congress

REIT Bill was filed in July 2007 by Rep. Juan

Edgardo M. Angara in the House of

Representatives, with co-authors including

Reps. Abraham Kahlil B. Mitra, Paul R. Daza,

Hermilando I. Mandanas, Ramon “Red” H.

Durano VI, Eduardo Nonato N. Joson and Prepared by Atty Josh Carol T.

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(REIT) Act of 2009 or RA 9856 Roman T. Romulo.

It was Sen. Edgardo Angara who authored

the Bill in the Senate. A technical working

group (TWG) was formed at both upper and

lower houses of Congress to address critical

issues and to finalize the draft bill.


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(REIT) Act of 2009 or RA 9856 REIT bill became a law on December 17,

2009

REIT law became effective on February 9,

2010.

SEC released the final version of the (IRR) of

the REIT on May 13, 2010


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(REIT) Act of 2009 or RA 9856 Amendments to the IRR, was through SEC

Memorandum Circular No.2 Series of 2011,

on April 27, 2011


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(REIT) Act of 2009 or RA 9856 The Bureau of Internal Revenue released

Revenue Regulations 13-2011, Implementing

the Tax Provisions of Republic Act No. 9856

on July 25, 2011.


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(REIT) Act of 2009 or RA 9856 Main purpose of the REIT Law is to allow both

small and large investors to participate in the

direct ownership of real estate

It is an alternative investment instrument to

foreign investors as well as OFWs.


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(REIT) Act of 2009 or RA 9856 It provides real estate companies a cheaper

source of capital while promoting economic

development, growth in tourism and liquidity in

the capital markets.


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(REIT) Act of 2009 or RA 9856 For the protection of investors, a listed REIT is

subject to stringent requirements.

Oversight of the real estate property is

professionally managed.

Among the Law’s many benefits is the

multiplier effect it will have on the economy.


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(REIT) Act of 2009 or RA 9856 Policy of the State

a) to promote the development of the capital

market,

b) democratize wealth by broadening the

participation of Filipinos in the ownership of real

estate in the Philippines

c) use the capital market as an instrument to help

finance and develop infrastructure projects


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(REIT) Act of 2009 or RA 9856 Policy of the State

d) and protect the investing public by providing

an enabling regulatory framework and

environment under which real estate

investment trusts, through certain incentives

granted herein, may assist in achieving the

objectives of this policy


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(REIT) Act of 2009 or RA 9856 The enactment of Republic Act No.9856,

otherwise known as the Real Estate

Investment Trust (REIT) Law, established the

legal and regulatory framework and provided

a favorable market environment for the

development of Philippine REITs.


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Salient Features of REIT Act of

2009 (RA 9856)

Registration & Licensing

• A REIT must be organized as a Philippine corporation and be listed at the Philippines Stock Exchange (PSE)


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2009 (RA 9856)

Public Ownership

• Upon and after listing, a REIT must have at least 1,000 public shareholders each owning at least 50 shares of any class and aggregately must own at least 40% of the outstanding capital stock of the REIT at the initial year


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2009 (RA 9856)

Public Ownership

• Minimum ownership to be increased to 67% w/in 3 years from its listing

Minimum

Paid Up

Capital

• A REIT must have a minimum paid-up capital of P300 million at the time of incorporation which can be in cash or in property. No part of the paid up capital shall be used to pay prior debts or encumbrance of its real property assets.


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2009 (RA 9856)

Aggregate Leverage

Limit

• A REIT is only allowed to borrow or deferred payment up to 35% of its deposited property.

Foreign Equity Ownership

• A REIT that owns land in the Philippines must comply with the foreign ownership limitation imposed by the Constitution.


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2009 (RA 9856)

Dividend Distribution

• A REIT must distribute annually at least 90% of its distributable income as dividends.


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2009 (RA 9856)

Dividend Distribution

• Distributable income is defined as net income as adjusted for unrealized gains and losses/expenses and impairment losses and other items in accordance with internationally accepted accounting standards. It excludes proceeds from the sale of the REIT's assets that are re-invested in the REIT within one year from the date of the sale.


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2009 (RA 9856)

Allowable

Investments

• A REIT may only invest in the following types of assets:

• real estate located in the Philippines and other real estate-related assets

• managed funds, debt securities and listed shares issued by local or foreign non-property corporations Prepared by Atty Josh Carol T.

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2009 (RA 9856)

Allowable

Investments

• A REIT may only invest in the following types of assets:

• government securities issued on behalf of the Philippine government or governments of other countries as well as securities issued by multilateral organizations, and

• cash and cash equivalents Prepared by Atty Josh Carol T.

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2009 (RA 9856)

Allowable

Investments

• Nevertheless, a REIT may invest outside the Philippines provided that its total investments do not exceed 40% of the REIT’s deposited property and that it has obtained the special authority from the Securities and Exchange Commission


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2009 (RA 9856)

Investment

Restrictions

• A REIT may invest no more than 5% of its investible funds in synthetic investment products and only upon the approval of appropriate regulatory agency

• At least 75% of the deposited property of the REIT must be invested in income-generating real estate


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Synthetic Investment Products

- are derivatives and other securities created

exclusively out of one or more financial

instruments to simulate the returns of the

underlying financial instruments, such as

credit - linked notes, collateralized debt

obligations. total return swaps, credit spread

options, credit default options, and similar

products determined by the Commission.


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2009 (RA 9856)

Investment Restrictions

• A REIT cannot undertake property development activities unless it intends to hold the developed property upon completion. The total contract value of property development activities undertaken and investments in uncompleted property development cannot exceed 10% of its deposited property.


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2009 (RA 9856)

Investment

Restrictions

• Not more than 15% of investible funds of the REIT may be invested in any one issuer’s securities or any one managed fund, except with respect to government securities where the limit is 25%


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2009 (RA 9856)

Investment

Restrictions

• When investing in real estate as a joint owner,the REIT should make such investment by acquiring shares or interests in an unlisted special purpose vehicle constituted to hold/own the real estate and the REIT should have freedom to dispose of such investment.


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2009 (RA 9856)

Investment

Restrictions

• The joint venture agreement, memorandum and articles of association or other constitutive document of the special purpose vehicle should provide for a minimum percentage of distributable profits that will be distributed, and grant the REIT veto rights over key operational issues of the special purpose vehicle.


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2009 (RA 9856)

Valuation

• REIT assets must be fully valuated at least once a year by an independent appraisal company.

Fund/Property Management Fees

• Fund and property management fees should not exceed 1% of the net asset value of the asset under management.


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2009 (RA 9856)

Fund and Property Manager

• Both the fund manager and the property manager must be :

• (1) independent from the REIT and its sponsors and promoters;

• (2) must have independent directors

• (3) must comply with the fit and proper rule

• (4) must not have a conflict of interest


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2009 (RA 9856)

Tax Incentives

• REIT is exempted from the minimum corporate income tax of 2% of gross income

• income payments to a REIT will be subject to a lower creditable withholding tax of 1%


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2009 (RA 9856)

Tax Incentives

• Sale and transfer of assets to REITs shall be subject to only 50% of the applicable DST

• Dividends paid by REITs will be subject to a final tax of 10%, subject to certain exemptions.


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2009 (RA 9856)

Tax Incentives

• Dividends distributed by a REIT from its distributable income between the close of a taxable year and the last day of the fifth month following the close of the taxable year shall be considered as paid on the last day of such taxable year.


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Advantages of REITs Here are some of the advantages from REITs to

developers, investors and the general economy.

Reliable Income Streams

• REITs own tangible assets and earn rents from tenants that often sign leases.

Diversification

• REITs portfolio are comprised of various properties in various locations reducing risk and volatility of investments.


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Competitive return

• In 2009, the average dividend yield of Asian REITs ranged from 4.1-9.3%, which are higher than the interest rates given to traditional investment vehicles such as savings and time deposits. With prevailing low interest rates in the country, REIT could be an attractive alternative nvestment instrument for investors.


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Tax Benefits

• Ordinarily, REITs legal framework offers tax benefits to sponsors in exchange for attaining certain conditions such as how income are distributed and the type of properties held Free up capital

• REITs help property developers to redeploy their capital investment in other forms of opportunities. It also allows them to hold their investments in a liquid form. Prepared by Atty Josh Carol T.

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Economic Growth

• The growth of REIT industry is expected to stimulate the economy as the real estate sector is linked to construction, services and consumer sector.

Encourage savings • REITs enable small-time investors to participate

in the real estate market Small time investors do not need to generate large amount of money to invest in the real estate sector togenerate the same return given to large investors Prepared by Atty Josh Carol T.

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Disadvantages of REITs

Revenue losses

• The REIT law offers various incentives to operators. Government stands to lost billions of pesos in foregone revenue. DOF projects a loss of P 2.7 billion.

Uncertain dividend yield

• Dividend returns from REITs is not guaranteed as it is subject to the rise and fall of rental income.


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Disadvantages of REITs

Slower growth of return

• REITs are required to pay 90% of its distributable income as dividends. Thus, REITs have fewer resources to re-invest in the business, which hampers the long-term growth of the company


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Sources

Capital Research , May 2010, Issue No. 2,

First Investment Corporation : Real Estate

Investment Trusts : Is the Philippine Ready for

it?

http://jakenasolloria.wordpress.com/2013/01/2

0/what-philippines-real-estate-investment-

trusts-reits-long-overdue/


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http://jakenasolloria.wordpress.com/2013/01/20/what-philippines-real-estate-investment-trusts-reits-long-overdue/

























Sources

http://www.housinginteractive.com/global-

realtor-blog/real-estate-investment-trusts-reits-

ph-property-market/#sthash.yoe0772G.dpuf

http://jakenasolloria.wordpress.com/2013/01/20/w

hat-philippines-real-estate-investment-trusts-reits-

long-overdue/


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http://www.housinginteractive.com/global-realtor-blog/real-estate-investment-trusts-reits-ph-property-market/





































Sources

PSE website - www.pse.com.ph/REIT/

SEC website - sec.gov.ph


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http://www.pse.com.ph/REIT/

DAGHANG SALAMAT


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