Whichever way you look at it, the successful passage of the Real Estate Investment Trusts (REIT) bill through both houses of the Philippine Congress earlier this month is a watershed development. After more than two years of deliberation, not only will the new law provide the legal framework for the creation of a categorically different class of financial product — and, in the process democratise commercial property ownership — but will also act as a catalyst for further development of the country’s nascent capital markets.

Balance

While lawyers are certainly enthused by the new REIT framework and the impact it will have on the Philippines economy, many believe it to be a little stricter than other REIT regimes in the region.

“It is a very positive step for the Philippines economy, and the authorities, in producing this law, have tried to adopt the good points from other jurisdictions and produce a more conservative framework,” said Elizabeth Opeña, a partner with Quisumbing Torres in Manila.

The more conservative elements to which Opeña refers to involve a more active role for the country’s Securities and Exchange Commission (SEC) and additional layers of corporate governance requirements —neither of which are found in REIT regimes in Singapore or Hong Kong. 

Milton Cheng, head of Baker & McKenzie's Asia Pacific REIT Practice says that in the Philippines model, it appears that the SEC will oversee not only REIT managers but potentially also the managers of the property underlying the REIT. There will also be a strengthening of corporate governance checks and balances in the form of requirements for independent directors at both the fund manager and the property manager level, and the need for property and fund managers to remain functionally independent from the REIT sponsor.

“The model appears to be an enhanced version of what is already in place elsewhere in Asia," he said. " Hopefully the implementing rules and regulations will provide further indication of how these new  features will be implemented and whether  they  will be tempered to strike  an appropriate  balance between making  them  user-friendly and well-regulated.”

Both Cheng and Opeña are hoping that these issues will be relaxed somewhat in the bill’s enabling rules and regulations, which should be released 90 days after the bills is assented to by the president.

Francis Lim, president and CEO of the Philippine Stock Exchange told ALB that while any lingering concerns will be “fleshed out” when the regulations are drafted, the measures — which he adds take “best global practices in the REITS industry” onboard — are necessary for its success. 

 “The provisions in the new law attempt to strike a good balance between the development of a good REITS industry and investor protection,” he said. “The involvement of the regulator in overseeing the REITS manager and the property manager is part of this balance which our legislators believe would ultimately benefit the industry in general.”

The same is true of the corporate governance obligations imposed. “The fund manager and property manager must comply with corporate governance requirements as a means of protecting the investors from potential abuse that may arise from the relationship between the fund or property manager and the REITS sponsor,” Lim said.

Deterrence and democratisation

The question is whether these ‘strict’ provisions will deter investment in Philippine REITs.

Lim rejects such assertions pointing to the already high number of inquiries his team at the PSE are already handling. “I don’t see why this involvement [of the regulator in overseeing the REITS fund and property manager] should adversely affect things…we are encouraged by the high interest generated by the new legislation,” he said. “Even before the bill was passed by Congress, a good number of property companies and underwriters have been meeting with our staff in the [PSE]. This early, they are preparing for REITS listing, which is required by the law for the REITS to enjoy the very liberal tax incentives that it grants.”

In addition to establishing a legal framework to facilitate REITs, the law will also offer numerous tax breaks for exchange-listed REITS that distribute 90% of income to investors.” (See box for more detail.)

But it isn’t just the country’s largest property developers — the likes of Ayala, Robinson Land and SM Prime — who are showing the most interest. A “high number” of domestic retail investors are keen to acquire their own slice of property in a country which boasts the world’s third, fourth, seventh and eleventh-largest shopping malls.

“The new law is significant in that it also goes a long way to democratising commercial real estate in the Philippines," said Cheng. "Before, if people wanted exposure to a shopping mall or something similar the best you could do was to buy into shares in the listed company that owns the mall [typically the developer of the shopping mall].  However given the multiple business interests of the listed company, it would be hard to be sure that you were getting a return, or a revenue stream, that is directly linked to the performance of those malls. But having a REIT regime will allow the average man on the street to become a “mini landlord" of an identified portfolio of properties, with a liquid, exchange-tradable interest in the form of the REIT shares.”

Investing in Philippines REITS is also likely to attract interest of investors elsewhere in Asia. Wealthy investors in countries such as Japan, Korea and Taiwan, who will often be guaranteed only paltry returns of 0-1.5% spreads on their bond investments at home, will likely be looking at returns of at least7%.

Broader impact

While the REITs bill will revolutionise the concept of commercial property ownership it is also poised to provide the much-needed stimulus for broader economic development, particularly on the nation’s capital markets.

At the moment, the market capitalisation of the 245 companies listed on the Philippine stock market is only around US$82bn, something of an embarrassment when compared to others in the region. Indonesia and Thailand, for example, each have market capitalisations in excess of US$200bn and 388 and 523 listed companies, respectively.

The Philippines stock market is also well below the regional averages for equity, ETFs, mutual fund, corporate and government bonds as well as IPO listings, and has one of the lowest participation rates (0.5% of the population) of any exchange in Asia and one of the slimmest ECM product offerings. 

“We pale in comparison with other exchanges in the region and that is why we at the Exchange worked hard for the passage of this new legislation,” said Lim. “This new product will definitely pave the way for the development of the Philippine capital market, which is one of the declared objectives of the bill.”

While longer-term development will turn on, as Lim points out, the success of REIT in the country — not to mention the prevailing economic conditions — in the shorter-term the fact that REITS offer investors a new class of exchange-traded products should be as good a starting point as any for further development of the country’s capital market and its economy more generally.