REIT: The new stock on the block

Published September 10, 2021, 12:05 AM

by Manila Bulletin

Editorial

After waiting years for the right regulations to be put in place, the country’s top property developers were finally ready to launch their real estate investment trust offerings only to have the party crashed by COVID-19 which ignited so much volatility in the local stock market.

However, despite the economic downturn, the office leasing business has proven to be resilient and “pandemic proof” so property firms designed their REITs to have mostly pure office portfolios and market investors have welcomed them with enthusiasm.

A real estate investment trust (REIT) is a stock corporation put up to of own income-generating real estate assets with regular earnings from rent and usage fees such as apartment or office buildings, medical facilities, hotels and resorts, highways, warehouses, shopping centers, railroads, among others.

For property companies, transferring these assets into a REIT allows them to raise fresh and cheaper funds that can be used to finance acquisitions, development and expansion projects without losing majority control over these assets.

In a way, by offering REIT shares, they are converting future earnings into instant cash since the stock market usually prices shares about 15 times their annual earnings.

For investors, a REIT is a type of investment instrument that provides a return derived from rental income of the underlying real estate asset distributed through dividends, making them comparable to securities such as bonds with the added bonus of the possibility of share price appreciation.

The purchase of shares of stock of REITs
allows investors, especially small or retail investors, to participate in the ownership of one or more income-generating real estate. In the case of the current crop of REITs, these are mostly premium office buildings in choice locations inside central business districts.

As an investment, REITs attract many investors because of the assurance of dividends. As mandated by law, investors can expect to receive annually 90 percent of distributable income of a REIT as dividends.

Aside from allowing investors to earn passive income that’s potentially higher than yields from time deposits and government bonds, a REIT’s is able to give a better yield because it’s income is exempt from the 30 percent corporate tax.

Unlike most hard assets or fixed income securities, REITs have market liquidity, so investors can easily buy and sell REIT shares through the Philippine Stock Exchange.

REITs also allow investors to invest in a portfolio of different properties, locations and property types at a fraction of their cost. It is like being the landlord of multinational companies in various prime locations minus the headache of operating them.

Another advantage of REITs is that, since they are publicly-listed, they are subject to increased disclosure and other requirements of regulators, thereby generating more transparency and lessening perceived risk.

The downside of REITs is that it will give out lower dividends if rental demand weakens, resulting in higher vacancy and lease rates.

This is why investors should check the reputation of the real estate company sponsoring the REIT and look carefully at the quality of assets the REIT holds and see if they are located in prime locations with good access and if the building enjoys fiscal incentives from the government.

They should also look at the quality of the REIT’s tenants and how long before the lease of existing tenants expire as well as the REIT’s potential for growth based on the assets of the sponsor which could be infused into it later.

 
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