The Philippine economy has seen a lot of growth in the past year, and this has been mainly driven by numerous activities in the property sector. In order to sustain the real estate market boom, however, there is a need to keep the country competitive in the eyes of investors-and this can be done by launching a different REIT system.
What is an REIT system?
REITs, also known as real estate investment trusts, are companies that own and manage real estate assets that generate income. These assets often include office spaces, apartment buildings, condominiums, hotels, shopping malls, and infrastructure. It is a security that allows individuals to invest in the company either by purchasing shares or investing in real estate mutual funds. Most of the countries in Asia have already created their own REIT systems, including Thailand, Malaysia, and Taiwan.
What aspect needs to be changed in the current system?
In the Philippines, the provisions of the existing REIT Act of 2009 have failed to attract companies, mainly because of the tax structure. These stringent provisions and conditions include a 12% VAT on transfer of assets, a 30% income tax rate, and 40% minimum public float for REIT firms in the first two years. Compared to other Asian countries, these levels are a lot higher, which is why potential investor companies who initially expressed interest in the product opted for countries with better REIT systems.
How can a better REIT System benefit the Philippines?
A better REIT system can benefit developers, investors, and the country's general economy as it encourages investors to put their money into developing Philippine properties through tax benefits. Though its short-term effect would be to yield lesser income for the government, the right REIT framework may encourage more investors, which can have a long-term effect on the economy. It also frees up the capital of property developers since it gives them the option to redeploy their investment in other forms of opportunities, which can boost other sectors in the market.
At the same time, implementation of REITs can also empower small-time investors, allow them to participate in the real estate market, and benefit from the returns without the need to generate a lot of money. It also provides diversification for investors-REITs portfolio includes different properties in separate locations, which reduces risk and volatility of investments.
With a good REIT system, the real estate boom will be properly sustained as it raises the profile of the country's market for foreign investors. Under this framework, investors would have an additional source of capital and would be capable of establishing a healthy capital environment.
Have any questions about today's article? Feel free to contact KMC MAG Group's Investments and Capital Markets team today.