SINCE the passing of Republic Act 9856 in 2009, the real-estate market has been anticipating the realization of the Real Estate Investment Trust. Challenges, such as high friction cost and the level of minimum public float, have discouraged developers and property owners from transfering their assets into REITs.
But with the recent move by the government to amend the rules on REITs, 2019 might be the year when we finally see the first wave of REIT companies take off.
A REIT is a publicly listed stock corporation that owns income-generating real-estate assets, such as malls, offices and hotels. Envisioned to promote the development of the capital market, REITs are instruments to recycle capital. REIT companies are also mandated by law to distribute 90 percent of their retained earnings as dividends, which benefit investors.
Rick Santos, chairman and CEO of leading property consultant Santos Knight Frank, believes there is no better time for REITs to enter the market than now. “REITs have the power to democratize the Philippine property market, allowing the small individual investor on the street to invest in high-value real-estate assets along with the big players,” said Rick.
A real-estate veteran, Rick and his team were involved in helping craft the REIT Act a decade ago with one of the law’s proponents, the late Sen. Edgardo Angara. Rick today leads Santos Knight Frank’s REIT advisory group that provides a wide range of REIT-related services to clients. His company is part of the Knight Frank Global Network with presence in prominent REIT markets such as Singapore, Hong Kong, Australia, the US, Malaysia and Thailand. Having advised REIT corporations and investors on structure, management and legal requirements, Knight Frank has been extensively involved in various services to support REITs, such as valuation, IPOs and due diligence work on the acquisition of assets.
In Hong Kong, Rick saw first hand the success of H-REITs when the first company, The Link REIT, was launched in 2005. Backed by Knight Frank’s global experience, Rick believes on the promising future of the industry once REITs take off in the country.
“REITs will benefit not just the real-estate sector but the economy at large,” said Rick.
Here are the key reasons why:
1. New capital for development and regional expansion
REITs are publicly listed companies that own income-generating real-estate assets. By transferring assets into REITs, developers and property owners recycle capital and generate funding that can be used in additional property developments and expansion projects, especially in growth areas such as the provinces. The Link REIT’s IPO in Hong Kong in 2005 was valued at $2.5 billion. India’s first REIT—a portfolio of Blackstone and Embassy Group set to be offered this year—is estimated to raise $1 billion and inject much-needed capital in the market.
“REITs will unlock new capital and potentially fuel construction activities and growth across the country,” said Rick.
2. Job creation
New jobs come throughout a property asset’s life cycle. As more developments emerge, the local work force is tapped to fill in jobs created by tenants and new businesses. Since REITs can also include real-estate assets, such as schools, hospitals, power plants and infrastructure, the job-creation opportunities cover a vast range of industries. The Association for Real Estate Securitisation in 2012 estimated that Japanese REITs generated a total of 300,000 jobs between 2001 and 2011.
One sector that has benefited from the expansion of real estate is the IT-BPM industry, which today employs about 1.5 million direct jobs and 3.5 million indirect employees. If newly generated capital were to be poured into expanding major sectors such as office (IT-BPM) and manufacturing, the multiplier effect will be highly beneficial for the economy.
3. Low risk
A REIT is seen as a less risky form of investment and less susceptible to speculation. With REITs, investors earn through dividends and capital appreciation. The law requires that 90% of a REIT’s retained earnings should be distributed as dividends. Amid the volatility of stocks, investors who are looking for stable investments will find REITs more attractive than other financial instruments.
4. Real-estate innovation and best practices
REIT companies will look for ways to grow and invest in assets with attractive returns. This pressures REITs to be creative and drive the expansion of emerging and niche sectors, such as coworking, coliving, logistics and tourism. Publicly listed, REITs will also inevitably adopt international best practices to run their assets as they strive to meet high standards of asset management and transparency.