Philippine REIT market unlikely to take off till tax reform package gets nod

By Krista A. M. Montealegre
National Correspondent
Posted on April 03, 2017 [ bworldonline.com ]

THE REVIVAL of talks to kickstart the real estate investment trust (REIT) market may take a back seat for now as the Finance department’s tax reform program faces rough sailing in Congress.

Laborers are seen at a construction site for a high-rise building project in Manila. Amendments to the rules on real estate investment trust are still up in the air as Congress focuses on a key tax reform package. -- AFP

During the fifth Asia Pacific Real Estate Investment Summit Philippines in Makati City last Friday, Philippine Stock Exchange President and CEO Hans B. Sicat said amendments to the implementing rules and regulations of the REIT Law may not move forward until the tax reform package -- a priority, he said, of the Finance department -- is first passed.

“Once they get that, it will be a refocus on the REIT topic,” Mr. Sicat said.

SEC Chairperson Teresita J. Herbosa said in an interview that Finance Secretary Carlos G. Dominguez III has committed to “look into this in the latter part of the year, around the third quarter.”

“The tax reform package will close some leakage and generate a little more tax collection so whatever will be lost when you remove the VAT (value-added tax) in the REITs will be covered,” Ms. Herbosa said.

The four-package tax reform program is designed to shift overall tax burden away from low wage earners toward those who can better afford such levies, while yielding more net revenues to help finance the administration’s infrastructure drive.

The REIT Act lapsed into law in December 2009, but none of the major property developers had come forward with their prospective offerings amid issues on ownership and taxation on asset transfers.

For instance, the government subjected the transfer of assets into REITs to taxation and levied a 12% rate on additional income generated. It also set the minimum public ownership of such trusts at 40% for the first two years of their listing and 67% thereafter.

The Aquino government had imposed these stringent REIT rules to limit revenue lesions caused by laws that grant generous tax perks.

“The issue for government is on fiscal reform. By stopping this asset class, what the government has gotten is zero pesos in the last five years which is the opposite to what we wanted to do,” Mr. Sicat said.

The SEC reiterated it is amenable to bringing down the public float level required for REIT firms to 33%, Ms. Herbosa said.

“We’ll let market forces (move) in the first five years,” she said.

Since 2009, the Philippines has missed the launch of 323 REITs, 82 of which are in Asia Pacific, with rising population and urbanization providing the “muscles” to spur demand for real estate in this region, Asia Pacific Real Estate Association (APREA) CEO Peter Verwer said.

Governments, however, are waking up to the advantages of having a REIT market.

“As we are waiting for the REIT rules to be refined because we are waiting for tax laws to be passed, a lot of us are reaching the 20% limit. So as not to curtail growth, we must look at alternative instruments to raise capital,” BDO Capital and Investment Corp. President Eduardo V. Francisco said.

REITs are companies that own and operate income-generating real estate assets, which include offices, apartment buildings, hotels, warehouses, shopping centers and highways.