A Real Estate Investment Trust or REIT is not something new but its significance became more pronounced as real estate companies began to ramp up their REIT portfolio or began to offer this among their products.
For those who are not deep into the real estate industry but want to find new revenue streams for their money, REIT is becoming an attractive proposition. In fact, some of our country's top developers such as Ayala Land, Megaworld, Filinvest, SMDC, Double Dragon Properties, etc. are now promoting their REIT offerings. But before you or anyone you know dive into this pool, be equipped with the knowledge, as the right information spells between doubling your profits or losing all your hard-earned money.
Manila Bulletin Property Living reached out to Kash Salvador, the director and head of Investments and Capital Markets of leading property management firm Santos Knight Frank to give us the basics of what REIT is all about. We gathered from our readers some questions they may have before they go into REIT. If the timing is right for REIT, then learning the REIT information is the right way to go.
1. In a nutshell, what is REIT?
A Real Estate Investment Trust (REIT) is a company that owns, operates, or finances income-generating real estate assets. Modeled after mutual funds, a REIT company consolidates the capital of investors and this allows investors to invest on real estate assets without having to fully acquire them.
2. News of different developers offering REIT is big news. Why now for these companies?
Developers recognize REIT as a means to generate new capital to invest and develop new real estate assets. Since the creation of the Philippine REIT framework in 2009, developers have finally agreed to the terms in the framework in 2020 that have addressed concerns on the taxation and Minimum Public Ownership (MPO).
The REIT allows the developer to secure new capital for new investments and developments without having the risk of defaulting when taking out a loan or paying up the maturity when floating a bond.
The assets included in the portfolio of the REIT have a stable revenue stream which will provide the developer a stable return on their investment minus the responsibility of handling the day-to-day operations of the assets as this will be managed by the in-house property management of the REIT
The developer can still own majority of the real estate asset after it has been consolidated into the REIT
The stable performance of REIT which was pioneered by Ayala Land (AREIT) prompted other developers such as Double Dragon (DDMPR), Filinvest (FILREIT), Megaworld (MREIT), and SMDC to venture in the investment class.
3. Is the pandemic a good time to be involved with REIT? Or should I wait after the pandemic ends?
REIT democratizes real estate investments as it allows anyone to invest on real estate assets without having to spend a large sum of money which can be ideal today, as several people are under financial distress while also recognizing the need for passive and additional cash flow in times of uncertainty.
With REITs just starting out in the country, this is a good timing for potential investors to capitalize on cheaper stock prices with the increased potential for higher capital gains.
Investing in REIT can also give an investor a steady stream of passive income as REIT companies are required to distribute earnings to its investors through dividends.
Since the assets in the REIT portfolio are stable income generating assets, anytime would be a good time to invest in REITs as it provides guaranteed returns to its investors. As long as the existing and future assets of the REIT will be able to deliver a stable and sizeable income then it can be considered one of the safest investments to get into.
4. Why the need for REITs when I can invest directly on the stocks of a developer?
REIT investments are based on the performance of income-generating real estate assets consolidated under the REIT company’s portfolio. While investment on the stock of a developer is based on the performance of the company itself.
The REIT also requires 90 percent of its net income to be distributed as dividends. Hence, a form of guaranteed return to its investors. Dividends from stocks of developers are not guaranteed and is subject to the discretion of the Board of Directors whether it will be issued or not.
5. What is a “recommended” amount that I should have before I venture into this? Or any amount will do?
The recommended amount to invest in REIT depends on the minimum amount required by a PSE-approved stock brokerage company that you prefer. However, a minimum amount of P5,000 can be a good starting capital for investment.
6. What do you recommend that I do (or study) before I get involved in this REIT?
It is recommended to familiarize how the stock market works as investing in REIT is similar to investing in the stock market. In addition, one must also learn how the real estate sector works as the stock performance of REIT companies are based on the performance of their real estate assets. Important to know the assets included in the portfolio of the REIT and try to find out its performance over time.
7. What indicators in the economy should I first check before I get involved with a developer’s REIT?
- Gross Domestic Product (GDP) – indicates the overall economic performance of the country
- Foreign Direct Investments (FDI) – indicates the foreign investor sentiment to the country
- Philippine Stock Exchange Index (PSEi) – indicates the overall stock performance of the public companies in the country
- Inflation – indicates the velocity in the rise of prices of commodities in an economy
- Interest Rates – indicates the policy rates implemented by the central bank to lending institutions
- Foreign Exchange – indicates the value of the local currency to foreign currency
- Employment Situation – upbeat employment situation indicates increased spending capability
- Mortgage Situation – indicates the lending rates of local banks in the country
8. How about gains and losses? What can I use as indicators?
A potential investor must look into the performance of real estate assets within the portfolio of a REIT company.
An investor must look into the value of assets handled by a REIT company, its selling/rental rates, asset supply and demand performance (sales velocity, take-up, absorption, and vacancy/occupancy rates)
An investor must also look into the overall performance of different real estate sectors. Currently, most of the assets handled by REIT companies are commercial (office and retail) and industrial properties.
9. Like in stocks, can my money be wiped out?
REIT companies are required by law (REIT Act of 2009) to distribute 90 percent of its net income as dividends to their shareholders. As long as the REIT company makes money, the shareholders are entitled to it. There is some return realized and can be looked forward to if the REIT performs well.
However, like any publicly listed companies in the stock market, REITs are prone to volatile situations especially if it is real estate related.
10. Some have said that this is a safer bet, is it true or it has the same risks as other financial investments?
There are risks involved on REIT investments as REIT prices can fluctuate over time due to many reasons such as economic performance, interest rates, performance of real estate assets, and other factors that may indicate the increase or decrease in the value of REIT.
As mentioned earlier some return is realized through the dividends that are required to be issued annually if the net income is positive. If this continues on a sizeable and consistent basis then there even is a possibility of recouping your investment over a long period without selling your shares.
11. Who do I approach when I want to do REIT? Can I join an investment’s group to do REIT?
REITs are traded through a public exchange. A potential investor may approach any PSE-approved stock brokerage firm if one wishes to invest in REIT.
12. Is this a long-term thing or just a “fad” of the market because of our present situation?
REITs trading and investment has been going on globally since the 1960s where it was first introduced in the US. REIT investments can be a long-term thing as REIT companies are required to distribute 90 percent of its net income as dividends and its stock performance is based on the performance of real estate assets. However, investments in the said asset class also depends on the goal and risk-appetite of an investor.
13. Some have said that this is another way of real estate developers to gain cash, is there truth to this?
The goal of REIT goes both ways for the developers and investors. Developers may benefit from REIT as it allows them to generate capital by transferring some of their assets to the REIT company and selling them partially in the form of shares of stocks to investors who become shareholders.
The capital generated can be used to fund future developments which can also be transferred in to the REIT to enhance its value. Shareholders receive regular dividends from the REIT company as mentioned earlier.
14. What is the future for REIT in the Philippines based on Santos Knight Frank’s assessments?
REITs are seen to expand in the coming years, especially with markets are gradually returning to normal due to increased vaccination efforts and reopening of businesses. The reopening of the economy is seen to be beneficial for real estate assets in the portfolio of REIT companies as demand and cash flow from these assets are expected to recover.
There will be an increase in REIT IPOs in the local bourse as major property players in the country will soon venture in REIT after the success of Ayala Land’s AREIT. Double Dragon and Filinvest have already filed for an IPO this 2021 while other major players such as Megaworld and SMDC have already expressed interest in venturing into REIT in the coming years.
15. What are my safety nets? Is there a government agency tasked to oversee if there's abuse or mismanagement?
REITs are governed and sanctioned by the Philippine Stock Exchange (PSE) and Securities and Exchange Commission (SEC) as these become publicly listed companies. There is transparency in the operation of the REIT as a result of it being publicly listed.