The Philippine Real Estate Investment Trust (REIT) law has created much buzz since end of 2018 (despite being enacted into law in 2009) as prominent local real estate developers are expressing their interest to securitise their assets. REITs present a new avenue to raise capital, diversifying the existing and practiced public and private capital formation in the country. The Philippines’ potential to expand investments through the use of REITs has been untapped due to roadblocks including the prohibitive 12% tax on transfer of assets and minimum public ownership (MPO) of 67%.

India’s REIT market had similar issues after REIT legislation was put in place in 2014. However, India worked through the regulatory barriers and launched its first REIT on March 2019 with the listing of Embassy Office Parks REIT. JLL India identified the key success factors for the listing of the first India REIT in their country, which include the following:

1. Progressive regulations creating a favourable REIT environment
2. Robust investor interest in a scalable and healthy market

These key elements could serve as a guide or learning for the case of Philippine REIT.

Market friendly regulations

India had a fair share of hurdles before the official launch of their first REIT in five years. Nevertheless, amendments and reforms on tax concerns were addressed to create a more favourable investment market for both sponsors and investors.  As mentioned, the Philippines’ REIT legislation has been in place since 2009 but its first IPO listing has not yet kicked off due to concerns on the part of real estate players on additional tax payments and the high level of public ownership. The current administration’s Tax Reform for Acceleration and Inclusion (TRAIN) is paving the way for the Philippines to modify its REIT regulation to remove the Value Added Tax (VAT) on the initial transfer of ordinary real properties and lessen the cost for real estate companies that want to securitise their assets into an REIT.

The Securities and Exchange Commission (SEC) has changed rules on MPO in 2011 by raising it to 40% in the first year; however, this further cemented hesitations on entering REIT. For now, SEC is yet to release its revisions on the REIT’s Implementing Rules and Regulations (IRR) to ensure profits from REIT are to be invested within the country.

A scalable and healthy real estate market

JLL India estimated that India has a significant amount of investment grade office space suitable for securitisation into REITs, totalling an estimate of 294 million sqft (27.3 million in sqm) as at end-2018. India’s office market enjoys robust demand from both domestic and foreign companies with IT companies taking up office spaces in key areas resulting to increases in rents and capital values. Parallel to this is the Metro Manila office market which has witnessed healthy demand for office spaces in recent years. In 1Q19, approximately 8.0 million sqm of Grade A office spaces in Metro Manila with most located in the cities of Makati and Taguig, two of the country’s prime CBDs areas.

Makati CBD and Bonifacio Global City (BGC) have seen exponential growth for the past few years with rentals and capital values increasing. While investors remain keen to allocate their capital in these CBDs, the majority of office space occupiers too prefer to locate in these areas. The chart below shows the average rental and capital growth in recent periods in Makati CBD and BGC.

Figure 1: Average Makati CBD and BGC Financial Indices (2014-2019)Source: JLL 1Q19 Asia Pacific Property Digest

The Philippine office sector has performed well and is expected to remain robust with healthy supply in the pipeline, resilient demand and stable rental growth. These factors should continue to fuel investor interest in the country. There is potential for other asset classes (industrial, retail, residential, and hospitality) to be securitised into REITs as the performance of these sectors continue to thrive and support the local real estate market.

A conducive tax regime, positive business environment, and a robust real estate market are some key elements that contributed to the successful listing of the first India REIT.  The Philippines market has similar traits that should allow it to follow the success of India’s public offering. Further, the country already possesses basic foundation to move forward.

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