REIT a welcome development for the real estate market – JLL

ByAaron Ronquillo

August 25, 2020

THE revised guidelines on Real Estate Investment Trust (REIT) in the Philippines have given investment sentiment for the property sector a much-needed boost, with the office segment seen as the most attractive asset class, according to real estate services and consultancy firm JLL Philippines.

In its latest research, “Philippine Real Estate Investment Trust: A Bright Spot in the Next Normal,” JLL says the REIT market in the country was very timely and could play a key role in jump-starting the economy from the adverse effects of the coronavirus disease 2019 (Covid-19) pandemic.

Janlo de los Reyes, JLL Philippines’ head of Research and Consultancy said REITs will provide a cheap funding source for developers, raising fresh capital to finance future projects, which in turn will ramp up construction activities and employment.

The REIT Act of the Philippines was passed into law in 2009. However, the market did not take off as firms and property developers found several provisions in the Implementing Rules and Regulations (IRR) of the law undesirable.

In January of 2020, the Securities and Exchange Commission (SEC) issued the revised IRR of the REIT Act of 2009, clearing the hurdles for local developers to enter the REIT market.

For instance, in the old IRR, the value-added tax (VAT) on the transfer of properties of REITs used to be 12 percent. The revised IRR eliminates the VAT and gives exemptions.

As a result of the revised IRR, the REIT market gained traction and Ayala Land Inc., through its subsidiary AREIT Inc., took the initiative and filed its REIT application to the SEC. Other firms such as Megaworld Corp., DoubleDragon Properties Corp., and Ortigas Land followed suit.

Office segment most appealing

The office segment is regarded to have the most appeal to investors because of its relatively stable outlook and resilient rental growth rates moving forward.

Outsourcing forms and the online gaming sector are those who are demanding more office space and this has contributed a lot to the office segment’s growth, which has been substantial.

“As the government targets to reopen the economy and increase the operational capacity of businesses, we expect demand to improve in 2021 and potentially normalize in 2022,” says Luis Zarcal, JLL Philippines assistant manager for Research and Consultancy.

He said traditional offices and owned and operated businesses will spearhead demand when quarantine restrictions are completely lifted. There may also be an increased demand for office spaces outside Metro Manila, Cebu and Davao. DoubleDragon has firmed up its plans to enter the REIT market to expand its presence in the provinces after realizing their potential for business continuity plans.

Zarcal added that foreign investments could drive demand for office space as they need to put up a local headquarters for back-end support.

Besides office space, the under-penetrated industrial or logistics space is another attractive segment for REITs. The lockdown caused by the Covid-19 pandemic forced the country to turn to online/e-commerce platform to access basic goods and services.

These platforms pushed businesses to speed up digitalization efforts as e-commerce has become the business of choice. This could result in an increase for demand in quality warehousing spaces to cater to this growing market.

On the other hand, the hospitality and retail sectors, two of the most heavily affected sectors by the pandemic, could be less attractive to list in a REIT for property developers.

“We don’t see the usual sector demand drivers, such as foreign tourists and business-related travels, to return to the market until a vaccine is invented to make travelling comfortable and safe again,” shared Zarcal.

“Moreover, for the retail sector, foot traffic in malls remains low due to persisting fears of virus transmission. Consumers thus prefer to shop via online platforms with takeout and deliveries becoming the norm,” he added.

While the short-term prospects for Philippine REITs may be weighed down by weaker than expected economic and real estate performance, JLL says the medium- to long-term outlook suggests a huge potential to transform the local real estate landscape.

Reasons to invest in REITs

REITs are seen to add flavor to capital markets where investors have been seeking new investment vehicles for a long time.

They are accessible and affordable. Unlike buying an actual property, REITs can be bought easily through stock brokerage accounts.

REIT is a liquid asset. An investor can easily sell its REIT shares through the stock exchange, whether in full or just a portion of its ownership.

Diversified assets are professionally managed. REITs can have multiple income-generating assets in its portfolio that are professionally managed. Investors are assured that the investment made are quality assets.

It offers good returns. REITs are mandated by the law to distribute 90 percent of its attributable income as dividends to investors.

“We believe that the REIT market will be the invisible hand that will guide the Philippine real estate market to develop into a more mature market, through transparency and competition,” said Zarcal.

“REITs will pave the way for more real estate transparency in the coming years, providing reliable benchmarks that were not readily available in the Philippine real estate market historically,” says Sharon Roset-Saclolo, JLL Philippines’ director for Valuation and Advisory.

JLL Philippines Country Head Christophe Vicic echoes the sentiment, saying “REITs should rapidly become a substantial alternative investment vehicle in the country’s real estate assets market. It allows everyday investors to buy shares with a very small amount of cash, pool together then leaving it to professional managers on how and where to invest. Without a REIT, it would be impossible.”

https://www.manilatimes.net/2020/08/25/business/real-estate-and-property/reit-a-welcome-development-for-the-real-estate-market-jll/759108/