Real estate investment trust (REIT) companies are set for takeoff in the Philippines as the government finally releases regulations that include ownership and taxation requirements that will spur additional investment in the country’s booming property development and infrastructure sectors.
The Department of Finance (DOF), Securities and Exchange Commission (SEC), Bureau of Internal Revenue (BIR), and Philippine Stock Exchange (PSE) launched the amendments to the regulations governing REITs in a joint signing ceremony on Monday at the DOF office in Manila.
The SEC issued amendments to the implementing rules and regulations (IRR) of the REIT Act of 2009.
In the same ceremony, the DOF and the BIR released a new revenue regulation updating the tax treatment of REIT transactions, specifically on tax incentives for REIT companies and the exemption from VAT of the transfer of property to a REIT company in exchange for its shares of stocks, among others.
The PSE also issued amendments to the Listing Rules for REITs that provide the appropriate mechanisms, internal controls, and procedures to monitor the compliance of REITs with the applicable rules and regulations.
In his opening remarks, Finance Secretary Carlos Dominguez III referred to REITs as “a powerful financial concept, enabling the creation of investment trusts that purchase, develop, and operate income-generating real estate assets.” The listing of REIT companies on the stock exchange create “a secure opportunity for small investors to participate in the growth of property development in the country,” and is “a big step forward for greater inclusiveness in the financial system.”
The government has revised regulations governing REIT companies in response to concerns of stakeholders, while ensuring that the gains from the implementation of the law would still redound to the benefit of the Filipino people. “We took on this challenge but had to be sure that the tax incentives would not be prone to abuse. We had to be very clear in our revenue regulations. This is why we needed to recast the existing revenue guidelines,” said Dominguez.
“We likewise wanted to be sure that the large investment funds to be raised using this mechanism will be reinvested exclusively within the country’s real estate and infrastructure sector. The reinvestment requirement is the regulatory framework, which ensures that the funds invested by Filipinos will stay in our domestic economy and will contribute to the improvement of our country’s infrastructure, rather than the benefits being squirreled away to other markets and countries,” he added.
Meanwhile, SEC Chairman Emilio Aquino echoed that the amendment of the REIT IRR advances the state policy to democratize wealth by broadening the participation of Filipinos in the Philippine real estate market.
“REITs allow Filipinos to invest in the real estate market without owning actual property or the disadvantages of high transaction costs and illiquidity,” Aquino said. “They also help investors achieve better returns or volatility outcomes by allowing property developers to diversify their portfolios.”
“REITs are a welcome addition to our product offerings as they will help our market become more competitive in the region,” PSE President-CEO Ramon Monzon said. “Potential issuers and investors, both retail and institutional, have been looking forward to the introduction of REITs in the country given the benefits of both listing and investing in this new asset class.”
The revised issuances are also welcome news to private sector players, who have been anticipating the amendments that will allow REIT companies to take off.
REITs were previously required to maintain a 40-percent public ownership in the first year of their listing. Prior to its amendment, Rule 4 of the IRR further required REITs to increase their public float to 67 percent within three years from their listing.
The revised IRR launched on Monday lowered the minimum public ownership requirement in line with the provision of the REIT Act that a REIT company must have at least 1,000 public shareholders each owning at least 50 shares of any class of shares and, in aggregate, at least one-third of the outstanding capital stock.
The SEC will also require that any proceeds from the sale of shares or other securities issued in exchange for income-generating real estate transferred to the REIT, and from the sale of any income-generating real estate to the REIT, must be reinvested by a sponsor or promoter in a real estate, redevelopment or infrastructure project in the Philippines.
To further facilitate the formation of REITs in the country, the SEC enhanced the qualification requirements of REIT fund managers and property managers under Rules 6 and 7 of the IRR, to ensure their independence and specify minimum requirements for their organization, among others.
The BIR, meanwhile, amended past revenue regulations to expressly exempt from the 12 percent VAT the transfer of property in exchange for shares for control in a REIT, in accordance with Republic Act No. 10963, or the Tax Reform for Acceleration and Inclusion (TRAIN) Law.
The BIR further removed the requirement for a REIT to place in escrow, in favor of the Bureau, the income tax collectible from the REIT on dividends declared and deducted from its taxable income, as well as the 50 percent documentary stamp tax (DST) given as incentive on the transfer of real property to the REIT.
The signing ceremony of REIT regulations was witnessed by AAMBIS-OWA Rep. Sharon Garin, chairperson of the House committee on economic affairs.