Do you want to participate in the real estate business in the Philippines? Do you know where to invest your money in real estate and create a real estate investment trust? If you don’t have the necessary knowledge about real estate investment, this article will help you know the basics about real estate investment trust.
What is Real Estate Investment Trust (REIT)?
Real Estate Investment Trust is a stock corporation established in accordance with the Corporation Code of the Philippines and the rules and regulations promulgated by the Securities and Exchange Commission (SEC) principally for the purpose of owning income-generating real estate assets.
For purposes of clarity, a REIT, although designated as a “trust”, does not have the same technical meaning as “trust” under existing laws and regulations but is used herein for the sole purpose of adopting the internationally accepted description of the company in accordance with global best practices.
What law provides for the legal framework for real estate investment trust?
The law which governs real estate investment trust in the Philippines is Republic Act No. 9856, or otherwise known as the Real Estate Investment Trust (REIT) Act of 2009.
How one can invest in a REIT?
Investment in a Real Estate Investment Trust (REIT) shall be by way of subscription to or purchase of shares of stock of the REIT.
A REIT may provide in its Articles of Incorporation different classes of shares of stock enumerating therein their respective features. No shares of stock of the REIT shall be offered for subscription or sale to Public Shareholders except in accordance with a REIT Plan registered with and approved by the SEC.
What is a REIT Plan and what does it contain?
REIT Plan refers to the plan, including its amendments, of the REIT registered with and approved by the Commission. The REIT Plan shall take the place of a prospectus.
The REIT Plan shall contain the following information:
- investment policy, restrictions and strategy of the REIT;
- discussion on the business plan for property investment and management covering the scope and type of investments made or intended to be made by the REIT, including the type(s) of real estate (e.g. leisure, residential, commercial, or industrial);
- general character and competitive conditions of all real estate now held or intended to be acquired by the REIT and how such real estate meets the established criteria for selection;
- nature and risks of making property investments in each of the relevant locations,
- terms and conditions of the arrangements or agreements that have been entered into by the REIT for it to own legal and beneficial title over specific property, and the benefits and risks of such arrangements
- transaction history of the relevant property in the three (3) years immediately preceding the date of the valuation report included in the REIT Plan;
- any proposed program with timetable for renovation or improvement to the real estate, including the estimated costs thereof and the method of financing to be used;
- the operating date of each of the real estate, including the occupancy rate, number of tenants and its mix in terms of occupation or business, principal provisions of the leases, average annual rental per square meter, and schedule of lease expirations for the next three (3) years;
- the borrowing policy and the method or proposed method of operating and financing the real estate investments of the REIT;
- where real estate to be acquired are to be financed (wholly or in part) through borrowings, details of the borrowings must be disclosed
- the measures in place to mitigate or minimize risks relating to the investment and management of real estate owned by the REIT;
- the dividend policy;
- the insurance arrangement for the assets of the REIT;
- the exit strategy in the event of divestment (including the exit from any joint ownership arrangement), factors and risks which may impact or act as an impediment to an exit, and the contingency plan;
- details of transactions or agreements entered into with related parties;
- full particulars of the nature and extent of the interest, if any, of any director of the REIT, the Fund Manager, the Property Manager or any Related Parties to the REIT;
- functions, duties and responsibilities of the Property Manager and the Fund Manager and, where applicable, shareholding of the Property Manager and/or the Fund Manager in the REIT;
- corporate information on the Property Manager;
- information on the directors and Principal Officers of the Property Manager,
- corporate information on the Fund Manager;
- information on the directors and Principal Officers of the Fund Manager;
- details on substantial fees to be paid by the REIT;
- the percentage rate to be paid by the REIT;
- disclosure on how the proceeds of the public offering and any other funds raised in connection with the public offering will be utilized with timetable; and
- pro-forma financial statements which shall include information on Net Asset Value and Net Asset Value per share before listing and after the proposed public offering.
What must be complied with by the REIT?
The shares of stock of the REIT shall be registered with the SEC in accordance with the Securities and Regulation Code, and listed in accordance with the rules of the Exchange.
A REIT that owns land located in the Philippines must comply with foreign ownership limitations imposed under Philippine law.
The REIT shall also comply with the following requirements:
1. Body Corporate
- Minimum Public Ownership. A REIT shall be a public company and to be considered as such, a REIT shall:
(a) maintain its status as a listed company; and
(b) upon and after listing, have at least one thousand (1,000) Public Shareholders each owning at least fifty (50) shares of any class of shares, and who, in the aggregate, own at least one-third (1/3) of the outstanding capital stock of the REIT.
A REIT shall, from the time of incorporation, issue shares to, or record the transfer of all its shares into the name of shareholders, investors or, securities intermediary in the form of uncertificated shares. It shall engage the services of a duly licensed transfer agent to monitor subsequent transfers of the shares.
- Capitalization. A REIT shall have a minimum paid-up capital of Three Hundred Million Pesos (Php300,000,000.00) at the time of incorporation which can either be in cash and/or property.
- Independent Directors. At least one-third (1/3) or at least two (2), whichever is higher, of the board of directors of a REIT shall be independent directors.
- Organization and Governance. As a public company, the REIT shall have such organization and governance structure that is consistent with the Revised Code of Corporate Governance and pertinent provisions of the SRC and its IRR
2. Executive Compensation. The total annual compensation of all directors and Principal Officers of the REIT shall not exceed ten percent (10%) of the net income before regular corporate income tax of the REIT during the immediately preceding taxable year, and shall be governed by the disclosure requirements.
3. Fund Manager and Property Manager Fees. The REIT shall engage a Fund Manager and a Property Manager in accordance with these Rules. The fees received by the Fund Manager and the Property Manager from the REIT shall not exceed one percent (1%) of the Net Asset Value of the assets under their respective management.
What are the allowable investments of the REIT?
A REIT may only invest in:
- Real estate. A REIT may invest in real estate located in the Philippines, whether freehold or leasehold. At least seventy-five percent (75%) of the Deposited Property of the REIT shall be invested in, or consist of, income generating real estate. A REIT may invest in income generating real estate located outside of the Philippines; Provided, that such investment does not exceed forty percent (40%) of its Deposited Property and only upon special authority from the SEC. An investment in real estate may be by way of direct ownership or a shareholding in a domestic special purpose vehicle constituted to hold/own real estate, subject to the conditions provided under these Rules.
- Real estate-related assets, wherever the issuers, assets, or securities are incorporated, located, issued, or traded.
- Evidence of indebtedness of the Republic of the Philippines and other evidence of indebtedness or obligations, the servicing and repayment of which are fully guaranteed by the Republic of the Philippines, such as, but not limited to, treasury bills, fixed rate treasury notes, retail treasury bonds, (denominated either in Philippine or in foreign currency) and foreign currency linked notes.
- Bonds and other evidence of indebtedness issued by: a. the government of any foreign country with which the Philippines maintains diplomatic relations, with a credit rating obtained from a reputable credit rating agency or a credit rating agency acceptable to the Commission that is at least two (2) notches higher than that of ROP bonds; and b. supranationals (or international organizations whose membership transcends national boundaries or interests, e.g. International Bank for Reconstruction and Development, Asian Development Bank).
- Corporate bonds of non-property privately-owned domestic corporations duly registered with the Commission with a current credit rating of at least “A” by an accredited Philippine rating agency.
- Corporate bonds of a foreign non-property corporation registered in another country provided that said bonds are duly registered with the Commission and the foreign country grants reciprocal rights to Filipinos.
- Commercial papers duly registered with the Commission with a current investment grade credit rating based on the rating scale of an accredited Philippine rating agency at the time of investment.
- Equities of a non-property company listed in a local or foreign stock exchange, provided that these stocks shall be issued by companies that are financially stable, actively traded, possess good track record of growth and have declared dividends for the past three (3) years.
- Cash and Cash Equivalent Items.
- Collective investment schemes duly registered with the SEC or organized pursuant to the rules and regulations of the BSP.
- Offshore mutual funds with ratings acceptable to the SEC.
- Synthetic Investment Products, provided that: (i) Synthetic Investment Products shall not constitute more than five percent (5%) of the Investible Funds of the REIT; (ii) the REIT shall avail of such Synthetic Investment Products solely for the purpose of hedging risk exposures of the existing investments of the REIT; (iii) the Synthetic Investment Products shall be accounted for in accordance with PFRS; (iv) the Synthetic Investment Products shall be issued by authorized banks or non-bank financial institutions in accordance with the rules and regulations of the BSP and/or the SEC; and (iv) the use of Synthetic Investment Products shall be disclosed in the REIT Plan and under special authority from the SEC.
Investments of the REIT shall be recognized and measured in its financial statements in accordance with the requirements of Philippine Financial Reporting Standards (PFRS) and the applicable interpretations or any amendments thereto, as follows:
a. Investment Property (PAS 40 and related standards);
b. Financial Assets (PAS 39, PFRS 7 and related standards);
c. Investments in Associates (PAS 28);
d. Investments in Subsidiaries (PAS 27);
e. Interests in Joint Ventures (PAS 31);
f. Non-current Assets Held for Sale and Discontinued Operations (PFRS 5);
g. Leases (PAS 17).
PAS means Philippine Accounting Standards.
Who are the persons involved in REIT?
The following are the persons involved in REIT:
- The Adviser, who is either a lawyer, accountant, auditor, financial or business consultant, and such other persons rendering professional advisory services to the REIT.
- The Fund Manager, who is the person engaged by the REIT to implement the investment strategies of the REIT.
- The Property Valuer is an independent entity engaged by a REIT to value its real estate.
- The Property Manager refers to a professional administrator of real properties who is engaged by the REIT to provide the property management services. The property manager shall be responsible for managing all aspects of the real estate owned by the REIT.
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