Why invest in Philippine REIT (real estate investment trust)

Do you wish to become part-owners of airports, shopping malls, hospitals, tollways, warehouses, hotels, residential and commercial buildings, and other income-generating properties?

Of course yes. All of us want to be part in the real estate business because the income can come in two ways: rental income and the steady increase in the value of land.

But do we have the capital to invest in these properties? At any rate, maybe most likely no.

So here is where real estate investment trust or REIT is a good option.

Specifically in a way, it offers a means for the investing public who don’t have that much money to fund large-scale constructions to be able to participate in the business.

What is REIT?

Anyone wishing to get into real estate balks at the high capital outlay needed, such as constructing a commercial building for example, just to get started.

After the building is up, recurring costs also pile up such as taxes, security, repairs, rent collection, making sure vacancy is kept low, dealing with tenants, etc.

For this purpose, real estate investment trust or REIT allows the public to own shares of big properties with minimum capital and without having to worry about managing the day-to-day operations.

How does REIT work?

The Republic Act 9856, also known as the REIT Act of 2009, and the IRR (implementing rules and regulations) of the Securities and Exchange Commission on May 13, 2010 established REIT.

In particular, the law and guidelines provide a way for businesses to place their real estate assets in a stock corporation, the REIT, where the public can invest.

So large conglomerates can transfer their properties to this stock corporation, and then the public can buy shares from it.

Thus, the corporation owns income-generating real estate assets and has to abide by the following rules.

• Must be listed on the Philippine Stock Exchange.

• Minimum paid-up capital of ₱300 million

• Should maintain 33% public float, which is the portion of the company that is owned by the investing public.

• The company must have at least 1,000 public shareholders owning a minimum of 50 shares each.

• 70% investment in real estate assets or at least 35% of total assets invested in real estate.

• 90% of the net income is distributed as dividends.

• The company shall not invest in companies that are not publicly listed.

• Valuation of the company is conducted annually.

And now with the money pooled from the investors, the company can lease, manage, purchase or sell real estate properties. Likewise, it may also need to hire an independent property manager and a fund manager.

At any length, the property manager performs task related to the general upkeep of the assets such as security, collecting rent, customer service for tenants, among other things.

On the other hand, the fund manager is responsible in making sure that the company’s investment objectives are executed and met.

REITs are like mutual funds

In some ways, REITs are like mutual funds. For instance, the investing public buys shares of these companies. And they in turn use the pooled money to acquire assets that can increase the value of the shares.

Thus, in the case of REITs, those assets are offices, malls, warehouses, hospitals, airports, tollways, and other infrastructures. Hence, when you want to buy or redeem your investment, you need to trade the stocks from the exchange so you need to go through an eligible stock broker.

The process is different with mutual funds, where you just have to go to a mutual fund company if you want to invest or sell.

In addition, see below the similarities and the differences between the two.

DETAILS REIT MUTUAL FUND

Structure Corporation Corporation

Capital Pooled funds from investors Pooled funds from investors

Ownership Stocks Stocks

Value Stock price Net asset value per stock

Valuation Real-time End of the trading day

Assets Real estate Stocks and fixed income securities

Buy Purchase on the exchange Buy stocks from the mutual fund company

Sell Sell on the exchange Sell stocks to the mutual fund company

REITs in the Philippines

The very first REIT in the country, the Ayala Real Estate Investment Trust (AREIT), debuted in the market in 2020 and was 2x over-subscribed. According to available sources, expected dividend for this year is pegged at 4.85% in 2020 and expected to increase to 5.85% in the following year.

Recently, property company Double Dragon formed DD Meridian Park REIT (DDMP REIT) that included 7 buildings and whose share is priced at ₱2.25 apiece, which experts estimate to give dividend yield of 5.07% and 5.45% in the next two years, respectively. When it debuted on March 24, 2021, the price remain unchanged at the closing hour of the trading day.

On August 12, 2021, the Filinvest REIT (FILRT) traded in the local bourse for the very first time at a price of ₱7.00 per share. FILRT was sponsored by the Filinvest Land, Inc., previously known as Cyberzone Properties, Inc., owned by the Gotianun family. Its portfolio includes 17 buildings, all but one are located in Alabang. The other one building is located in Cebu City. About 9 out of 10 tenants are BPO (business process outsourcing) companies.

Other companies that are expected to follow suit or have expressed interest in the near future are SM Prime Holdings, and Robinsons Land.

Advantages of REIT

But why would you want to invest in REIT? Here are the many benefits.

• Minimum capital. It relieves the pressure in coming up with huge capital or resorting to debts just to become part-owners of real estate. They are affordable.

• Less hassle. No need to hire contractors and construction firms, etc. You would also not be involved in managing the properties, so you are saved from overseeing repairs, looking for tenants, providing security, paying for insurance, etc.

• Dividends. Investors are entitled to 90% of the net income. There’s also the chance that this goes up through hikes in rent and tariff/tolls, low vacancy rate, etc.

• Value appreciation. The price of the stock may increase due to growing demand, increase in the value of the lot, development of vicinity around the location, etc.

• Assets are finished and already generating income.

• Management. Expert managers oversee the company and its assets.

• Diversification. The stocks contain mixture of projects.

• Liquid. REITs can be traded on the exchange on any trading day.

• Transparent. Companies are required to disclose the financial status of the company.

• OFW tax-exempt. Overseas Filipino workers can enjoy tax-free dividends for seven years starting in 2020.

Disadvantages of REIT

• Some companies may own only the buildings but not the land they stand on, which may deprive shareholders the chance to ride on the increase of the land property value.

• Real estate is cyclical. The market can experience hiccups such as high vacancy, and that can mean lower revenue.

• It is subject to tax hikes on properties imposed locally and nationally.

• Slower growth compared to other equities as most of the income goes out to shareholders as dividends rater than being reinvested back to the business to create more value.

• Investment risks can include deteriorating property values, higher interest rate, debts, location, unfavorable tax environment, etc.

• Some REITs have high management fees and levels of debts.

• They’re also susceptible to interest rate hikes. Investors buy treasury bonds and bills when interest goes up, driving share prices of REITs down.

Is REIT right for you?

When done right, investing in REIT can be one way for the public to beat the effects of inflation. In other words, it can also an affordable alternative in helping people grow their wealth in the long term.

Of course, it may be suitable for investors who are looking for passive income. In fact, dividends are paid out annually, and if the price of the stock is undervalued then it can be attractive because you get higher yield.

To illustrate, yield is the amount of dividend over the stock price, so if the yield ₱10 and stock price is ₱100 the yield is 10%. And the higher the dividend and the lower the stock price, the better the yield becomes.

Nevertheless, it can also be good for long-term investing. Most of the income goes back to investors. The company may likewise take time to grow (unless it borrows huge sums) because it has less money in acquiring new assets.

Also, it can be an option for those who are looking to diversify their portfolio as it provides a way of exposure to the real estate industry. Indeed, it can give recurring income on a long-term basis.

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