A common aspiration of many people is to own real estate property like land, a house and a condominium.
Real estate can either be used for personal or commercial purposes. However, financial circumstances may prevent many from being able to purchase real estate properties given the high capital requirements and recurring costs.
In this regard, an emerging alternative in real estate investing would be the Real Estate Investment Trusts or REITs. In a way, this alternative helps democratize access to real estate.
The legal framework for REITs in the Philippines has been existing since 2009 through the Real Estate Investment Trust Act of 2009. However, certain provisions in the law covering aspects like public ownership levels and the application of VAT on the transfer of properties to REITs failed to entice real estate companies in participating. In 2020, the government decided to do revisions on the REIT law and as a result, major real estate companies have expressed intent to do REITs. More are expected to follow.
Based on the Securities and Exchange Commission, a REIT is a stock corporation established principally for the purpose of owning income-generating real estate assets such as apartment buildings, office buildings, medical facilities, hospitals, resorts, highways, warehouses, shopping centers, railroads, among others. It is a type of investment instrument that provides a return to investors derived from rental income of the underlying real estate asset. The public will have access to the REITs through the Philippine Stock Exchange.
There are four benefits associated with REITs. First, there is earning through dividends. Investors are entitled to receive 90% of distributable income annually. Second, there is liquidity since the shares of REITs are relatively easy to convert to cash.
Third, risk can be managed better through diversification. Through the REITs, investors can invest in a wide variety of real estate properties at affordable levels. Fourth, there is transparency since REITs are required to disclose information for the general public.
Just like any typical investment, REITs also have associated risks. Risks have to be considered by investors so that they will be able to develop expectations on required returns. Higher risk would imply higher required returns. Social unrest and political instability will have an adverse impact on the sector.
Real estate performance is greatly dependent on the performance of the economy. Business confidence and expectations about the future will affect earnings. Low real estate earnings will lead to low dividends.
In choosing what REIT to invest in, there are a couple of things that investors should consider. One key consideration would be the location of the properties. Different real estate locations have varying real estate values even within Metro Manila. Being cognizant of the thriving locations today can help investors decide prudently. It would be worthwhile to get key information on the planned infrastructure projects of the government in order to get a good glimpse of what locations are going to do well in the future.
Another key consideration would be the track record and reputation of the real estate company. Revenue growth and financial strength boost confidence in the company. Credibility is enhanced if the performance of past real estate projects in terms of capital appreciation and rental income appreciation would be positive.
Resilience is observed based on how the real estate companies respond during period of crisis. The quantity and quality of future projects serve as good indicators of how sustainable business will be.
Investments should be based on one’s purpose, goal, risk profile and time horizon. REITs are available and affordable alternatives that can help people beat inflation and growth wealth over time. If done right, REITs will allow real estate companies to hopefully grow and provide more opportunities in the economy.
Gemmy Lontoc is a registered financial planner of RFP Philippines. To learn more about personal financial planning, attend the 83rd RFP program this June 2020. To inquire, e-mail info@rfp.ph or text <name><e-mail> <RFP> at 0917-9689774.
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