Real Estate Investment Trusts (REITs) have become increasingly popular investments for those interested in gaining access to the lucrative real estate industry.
In order to get started, it’s important to understand what REITs are, how they work and their benefits for investors. This article explores all this, as well as the growing popularity of REITs in the Philippines.
Brief Overview of REITs and Their Benefits
Real Estate Investment Trusts (REITs) offer investors a vehicle for investing in income-generating properties without having to take on direct ownership of them. REITs pool together money from a variety of investors who then receive dividend payments based on their share ownership.
The main advantage of this is that investment opportunities with potentially high yields are made more achievable through diversification and minimum capital requirements. Additionally, there are tax benefits associated with these investments which can provide investors with a degree of value beyond their initial cash flow returns.
The Growing Popularity of REITs in the Philippines
The Philippine market is experiencing increasing interest from foreign investors seeking exposure within its rapidly growing economy, and many are looking to capitalize on returns from real estate markets through REIT investments.
There has been an upsurge in retail activity as more Filipinos look towards such options at a local level as well as seeing increased investments coming from institutional players internationally who consider it a strong investment option due to low wages, cheap energy costs and an expanding population similar to many other emerging market economies around the world.
Understanding REITs
Definition and Purpose of Real Estate Investment Trusts (REIT)
REIT stands for Real Estate Investment Trust, which is a type of financial instrument that offers people an indirect route to income-producing real estate assets, rather than direct ownership or control by individuals or corporations.
In essence, this method involves pooling funds from large groups of individual and corporate investors. These groups can consist of thousands or even millions of participants. These investors can then collectively own large residential properties such as condominium complexes or commercial structures such as shopping malls by purchasing shares listed on stock exchanges, including regulated exchanges in the Philippines.
This makes these investments accessible to both the local and international investment communities, bypassing the regional restrictions typically encountered when dealing directly with properties and developments.
The State of REITs in the Philippines
History and Development of REIT Legislation in the Country
The introduction of Real Estate Investment Trust (REIT) legislation by Congress through Republic Act No. 9856, also known as the Real Estate Investment Trust Act of 2009, set off a wave of interest from both local and foreign investors alike and helped precipitate a golden age within Philippine property investment markets.
The number of REITs in the Philippines is growing, with several companies already listed on the Philippine Stock Exchange and more awaiting approval for REIT status. As the REIT industry evolves in the country, tax incentives and regulations are subject to change. Investors should stay informed about the current status of REITs and related tax laws in the Philippines to make well-informed investment decisions.
Recent Changes in Regulations and Their Impact on Investors
In recent years, more emphasis has been placed on introducing regulations designed to protect investors and enhance transparency whilst, at the same time, encouraging further financial sector growth.
Recently passed legislation which applies directly to Philippine based REITs includes Republic Act No 10760 or otherwise known as “An act increasing the limits on eligible lenders for certain trusts”. This new law increases liquidity restrictions for Filipino-based investors who wish to invest amounts greater than five hundred thousand pesos (500,000 PHP). In addition, amendments made by Congress have changed tax reprieve exemption periods for Filipinos based on their actual income level; allowing those earning 150 thousand Pesos annually or less to be exempt from paying taxes altogether when investing into Philippine-based REITs .
Current List of Popular Philippine Based REIT Companies
The current list of popular REIT companies which trade publicly on some form of stock exchange include Aboitiz Equity Ventures Property Holdings Inc., Ayala Land Inc., DoubleDragon Properties Corporation Ltd., Federal Land Inc., RCD Realty Corp., Megaworld Corporation Ltd., Prime Orion Philippines Inc., Rockwell Land Corporation Ltd,. SMPH Residential Development Corp., Suntrust Home Developers Inc., Triple Dragon Properties Corporation Ltd., Vista Land & Lifescapes Co Ltd
Advantages of Investing in Philippine-Based REITs
Diversification Through Exposure to Real Estate
Investing in Philippine-based REITs is an ideal way for investors to gain long-term exposure to a roundabout selection of real estate assets such as retail space, office premises, guest houses, warehouses and other essential physical structures that drive the country’s economic activity.
With diversification through exposure to multiple kinds of property across different locations come significant diversification benefits – helping reduce risk across sectors and locations – that helps investors take advantage of potentially higher returns with reduced volatility.
Stable, Rent-Like Dividends Without Property Management Hassles
One of the main benefits of investing in Philippine-based REITs is the potential for attractive dividend income.
While the tax treatment of dividends and capital gains from REITs may vary depending on an investor’s tax residency and other factors, these investments can offer substantial returns for those who understand the tax implications. It is recommended to consult with a tax professional to ensure accurate and up-to-date tax information regarding REIT investments.
Potential for Capital Appreciation Due To Growth In Real Estate Value
Another advantage of PH-REITS is that they may appreciate over time if the underlying properties successfully deliver rental income growth.
This can result in capital gains upon disposals and price appreciation due to market demand when supply is limited or developing economies experience significant infrastructure developments that drive up property values.
However, this remains highly uncertain due to market conditions, and no guarantees can be made on potential returns for any given period.
Comparing Philippine-Based REITs with Other Investment Options
Investors looking for higher returns generally consider Real Estate Investment Trusts (REITs) when choosing where to invest their money. Comparing REITS with other investment options available in the Philippine markets can help in making this decision.
REITS vs Stocks
Stocks offer great potential for large returns; however, they can be very volatile and even if you have allocated your portfolio according to risk specifications, market dips will take their toll. With REITS you don’t get outpaced by volatile share prices as it is a much more stable investment due to its focus on rental income rather than gains from price fluctuations.
REITS vs Bonds
When comparing REITs with other investment options such as bonds, it is important to consider the different risk and return profiles of each asset class.
While bonds generally provide consistent interest payments, they may also offer capital appreciation opportunities if their market value increases. REITs, on the other hand, can provide both income and capital appreciation potential, making them an attractive addition to a well-diversified investment portfolio.
How to Choose the Best Philippine-based REIT Companies for Your Portfolio:
Sector Diversification
An important aspect of choosing any asset class is diversification, as this helps reduce overall risk and provides an opportunity for higher returns over time.
For portfolio diversification purposes, consider including multiple types of properties within your selection of Philippine-based REIT companies, such as residential, office space, industrial parks, hotels and more.
This allows for greater spread of ownership among different asset classes and minimizes risk; by investing in multiple sectors you can protect yourself from downturns or unforeseen changes in any one sector.
Location Considerations
Before adding any Philippine-based REIT company to your portfolio, it’s important to have a thorough understanding of where real estate investments are situated geographically throughout the country.
Certain areas may be more prone to fluctuations than others due to economic conditions or political instability both locally and abroad—thus having a better understanding of potential risks associated with geographical locations is essential before making any decisions regarding investment choices.
FFO/AFFO Analysis
It’s important to understand Funds From Operations (FFO) or Adjusted Funds From Operations (AFFO) when researching local REIT companies operating within the Philippines; these ratios indicate how well a company uses its cash flows (both current and future).
Factors like debt payments or capital improvements should also be taken into account since they affect long-term sustainability—investors should look out for FFO/AFFO ratios that exceed market median rates as this often indicates stronger financial performance over time compared with other competitors.
WALE (Weighted Average Lease Expiry) Factor
A lesser known assessment metric used by experts is Weighted Average Lease Expiry (WALE), which looks at weighted averages of lease expiry periods throughout an entire portfolio—this factor will help assess whether there are large percentage jumps between short term leases and long term leases that could affect revenue flow capacities over time; if you see larger percentages for short versus long terms this could spell potential issues going forward.
The WALE of a REIT is determined by the average tenure to the expiry of a collective of leases. If a REIT has 20 rental leases and 80% of it expires in 5 years time, the WALE would be longer. The size of the tenant can also impact the WALE significantly.
Dividend Yield
Finally, another factor that investors should consider when researching Philippine REIT companies is the current dividend yield offered; while not always indicative of superior performance over time, they do provide clues as to how efficiently management teams are spending their money – look for environmentally conscious companies or high performing markets if possible, as these tend to provide better opportunities than average dividend yields, thus increasing the overall return on investment in the long run.
Steps to Invest in Philippine-based REITS
To invest in Philippine-based REITs, follow these steps:
- Research and select a reputable stock broker that best suits your needs and preferences. There are numerous stockbrokers operating in the Philippines, each with its features and services.
- Open a trading account with your chosen stockbroker, providing the necessary documentation and completing the account opening process.
- Fund your trading account by depositing the required amount of money. Typically, stockbrokers have different funding options, such as bank transfers, checks, or online payment methods.
- Research and analyze the available Philippine-based REITs, considering factors such as historical performance, dividend yield, and potential for growth.
- Place your order to buy shares of the chosen REIT through your stockbroker’s trading platform, specifying the number of shares you wish to purchase and the desired price.
- Monitor your investment and make adjustments to your portfolio as needed, based on market conditions and your financial goals.
Before diving into the world of REITs, it is always recommended to consult with a financial advisor and stay updated on the latest market trends and regulations. This will ensure that you make well-informed investment decisions that align with your financial objectives.
Tips for Successful Reit Investing In The Philippines:
Investing in REITs is not without its challenges, especially if you’re new to property investment or the Philippine market. To make sure you get the most from your investment, here are some top tips for successful investing:
Participating in IPO launches through PSE EASy platform
One way to ensure you capitalize on good equity prices and stay ahead of trends is by participating in the initial public offer (IPO) process through a stock exchange such as the Philippines Stock Exchange Easy (PSE EASy).
You may find that these offers provide access to high-quality stocks at low prices before they become available on the general market.
Converting physical cash into electronic form is essential when trading stocks online. Online brokers enable individuals and businesses alike to securely buy and sell shares quickly on listings exchanges with volume discounts included for larger trades.
Determining if Philippine-based REITs are the right investment for you
Investing in REITs offers investors opportunities for diversification and risk mitigation without the stress of directly owning real estate assets.
The primary advantage of investing in REITs is gaining access to cash flows from rental income and potential capital appreciation over time. However, several factors should be considered before committing to this asset class.
Investors need to assess their financial goals, experience, and risk tolerance when evaluating REIT options within the Philippine market, which may have unique characteristics and require thorough research.
Ultimately, deciding whether to invest in Philippine-based REITs should be based on individual judgment and informed advice from financial professionals, considering the distinct nature of the local market.
