In what it claims to accomplish, is REIT really worth the investment opportunity they say it is?
Recent reviews on REIT say that it is the next big thing in real estate. It is designed to “open up new investing opportunities in real estate” for investors and “give property companies a new venue to raise funds for their property ventures to unlock value in their income-generating real estate assets.”
REIT or The Real Estate Investment Trust of 2009 is RA 9856 that actually lapsed into law without the signature of President Gloria Macapagal-Arroyo on December 17, 2009. It was published in two newspapers of general circulation on January 25, 2010, and became effective on February 9, 2010, following the regulatory period of 15 days from date of publication.
The Securities and Exchange Commission had released the draft of the implementing rules and regulations (IRRs) for public comments last April 21. If I’m not mistaken, the final IRR is expected to become official within the next three months.
New to the local scene, REIT has been in use in other markets as far back as the 1960s. It is a stock corporation formed for the sole purpose of investing in income-generating real estate assets.
Its revenues are derived from owning and managing real estate such as “apartment buildings, office buildings, warehouses, medical facilities, hospitals, mixed industrial/office buildings, commercial and residential properties and even highways that collect toll fees.”
Designed to earn as such, the REIT will operate like a mutual fund than a trust. It will be managed by a portfolio manager like a mutual fund. Investors will measure the value and performance of a REIT through its net asset value (NAV) and operating costs.
But unlike a mutual fund, it is designed to invest in properties or real estate instead of stocks and bonds. Its earnings are not based on capital gains returns as mutuals often do but from dividends like any stock corporation.
It is not the same as the mortgage-backed securities (MBS), which securitizes cashflow from existing mortgages such as interest and principal payments on housing loans. REIT securitizes cashflows from existing property assets such as rent, leases and other forms of income.
REITs can be an equity trust, mortgage trust, or construction and development trust. They can also be a combination.
As an equity trust, it owns various income-generating real estate properties such as office buildings, shopping centers, malls, apartment houses, healthcare facilities, hotels, and resorts. As a mortgage trust, it acquires long-term mortgages on properties whose construction is completed. As a construction and development trust, it provides financing to developers during the initial construction of the building.
The REIT company is a stock corporation that will engage in the ownership, management, leasing, acquisition, disposition, development, and expansion of property assets.
It must be listed in the Philippine Stock Exchange (PSE) with at least 1,000 shareholders owning a minimum of 50 shares each. It must have the minimum paid up capital of P300 million.
At least 90 percent of the net income of the REIT company must be distributed as dividends to its shareholders free of tax, as it is as well allowed to invest in foreign assets.
At least 75 percent of REIT assets must be income-generating real estate. Total borrowings and deferred payments may exceed 35 percent, but not more than 75% of the total deposited property value in the REIT.
Bottom line spin
By its key investment features, REIT looks attractive. It could certainly provide some new investing opportunity for the local investing public. It could further unleash locked values in the property portfolios of some good real estate companies.
There are several factors though that critically determines the viability and vibrancy of the business of a REIT company. The most important of which is the quality of the income-generating assets to be transferred in the property portfolio. They must be able to provide the cash flow to support dividend payments.
Among the listed companies that have expressed desire in raising funds through REIT, three companies stand out. A comparative look at the profile of their revenues will give us an idea on how they would probably provide the cash flow for the required dividend income of REIT investors as well as to who among them could probably better afford it.
Aside from the quality and nature of property assets transferred, a successful REIT company is also dependent on the quality and management competence of the fund manager and property manager appointed to realize investment objectives.