|Philbert E Varona|
In a move intended to help develop the Philippines' capital markets, broaden participation in real estate ownership and promote the financing and development of infrastructure projects, the Philippine Congress has enacted Republic Act No. 9856 (the Reit Law), establishing a legal framework for real estate investment trusts (Reits). The Reit Law became effective on February 25 2010. The rules and regulations issued by the Securities and Exchange Commission (SEC) to implement the Reit Law became effective on June 10 2010.
The Reits envisioned by the new law are patterned after Reits established and traded in other jurisdictions. Under the law, a Philippine Reit must be organised as a stock corporation for the purpose of owning income-generating real estate assets, ie. they must be held for the purpose of generating a regular stream of income. To help ensure high yields and enhance their marketability, Philippine Reits are required to distribute at least 90% of their distributable income to their shareholders as annual dividends.
The Reit Law provides that investment in a Reit shall be by way of subscription for or purchase of shares in its capital stock. Those shares may not be offered for subscription or sale except in accordance with a Reit plan that is registered with and approved by the SEC. As detailed in the rules, a Reit plan must contain information similar to that contained in a prospectus for a securities offering. The Reit plan must set out data such as the Reit's investment policy, strategy and business plan, a description of the real estate held or intended to be held by the Reit, the proposed method of operating and financing the Reit's investments and the Reit's dividend policy and risk management strategy.
A Reit must have paid-up capital of at least P300 million (approximately $6.5 million). Additionally, the shares in the capital stock of a Reit must be registered with the SEC and listed on the Philippine stock exchange. A Reit should also be a public company, ie, it must: (a) maintain its status as listed company; and (b) upon and after listing, have at least 1000 public shareholders, each of which must own at least 50 shares of any class of shares. Such public shareholders must also own an aggregate of at least one-third of the outstanding capital stock of the Reit. At least one-third or at least two (whichever is higher) of the members of the Reit's board of directors are required to be independent directors.
A Reit that directly owns land in the Philippines should also comply with the constitutional requirement that at least 60% of its capital stock must be owned by Philippine nationals.
A Reit may only invest in specified products. These include: (a) real estate in the Philippines, (b) real estate located outside the Philippines, provided it is income-generating, (c) real estate-related assets (ie, debt securities and listed shares issued by publicly listed companies and other funds and assets incidental to the ownership of real estate), wherever the issuers, assets or securities are located, issued or traded, (d) managed funds, debt securities and listed shares issued by local or foreign non-property corporations, subject to certain conditions, (e) securities issued by the Philippine government, by foreign governments with which the Philippines has diplomatic relations and which have an acceptable credit rating, or by multilateral agencies, (f) cash and other equivalent items, and (g) such other investment products as the SEC may approve. A Philippine Reit is generally not allowed to engage in property development, however, any may only do so under certain conditions prescribed by the SEC.
The Reit rules require a Reit to invest a minimum of 75% of the fair market value of the assets held by it (the deposited property) in income-generating real estate. Additionally, at least 35% of the fair market value of such deposited property must be invested in or consist of income-generating real estate in the Philippines. Investments in income-generating real estate located outside the Philippines may not exceed 40% of the fair market value of a Reit's deposited property and must be approved by the SEC in any event.
Reits are entitled to certain tax incentives. These include a provision allowing the deduction of dividends distributed by a Reit to its shareholders from gross income for purposes of determining its income tax liability. Income payments to are also subject to a preferential creditable withholding tax rate of one percent (as opposed to six percent). Additionally, documentary stamp taxes and registration fees on the sale or transfer of real estate to a REIT shall be reduced by 50%.
The establishment of a legal and regulatory framework for Philippine Reits is a welcome development. Hopefully these measures will help spur activity in the Philippine market.