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SEC OK’s rules implementing real estate investment trust law

Posted on 10:35 PM, May 11, 2010 [ BusinessWorld Online ]

CORPORATE REGULATORS finally approved yesterday rules that will implement the Real Estate Investment Trust or REIT Law.
There were minimal revisions to the draft issued by the Securities and Exchange Commission (SEC) last April 20 and opened for comments until April 26. The REIT rules will take effect after 45 days, an official said.
“The most substantial [change to the draft] is the capitalization of fund managers from the original P10 million to P100 million,” Gerard M. Lukban, commission secretary of the SEC, told reporters after the agency’s en banc meeting yesterday. Other than that, “Only editorial changes were made to refine [the rules].”
A REIT, as defined by the rules, is a stock corporation “owning income-generating real estate assets.” It must be listed on the stock exchange and have at least 1,000 shareholders, each with at least 50 shares of any class. The shareholders must own a third of the REIT’s outstanding shares.
In December, Republic Act No. 9856 or the REIT Law, which will allow companies to use pooled capital of investors to buy and manage income-generating property and mortgage loans, lapsed into law.
“[The Bureau of Internal Revenue’s inputs were included in] this IRR,” Mr. Lukban said.
A REIT should have a minimum capitalization of P300 million. It must dispense 90% of its distributable income -- defined as net income adjusted for unrealized gains or losses -- as dividends each year.
Property giants have already expressed interest to acquire funds through the investment vehicle. SM Prime Holdings, Inc., the country’s largest mall operator, last week said it was looking to raise as much as $600 million through a REIT. Last month, Ayala Land, Inc. also said it wanted to raise $300 million from REITs.
The rules also list the kind of investments a REIT can make: “A REIT may invest in real estate located in the Philippines, whether freehold or leasehold. At least seventy-five (75%) of the deposited property of the REIT shall be invested in, or consist of, income-generating real estate.” Deposited property refers to the total value of a REIT’s assets and investible funds. Other allowed investments include:
• real estate-related assets;
• debt papers issued by the government, whether denominated in peso or foreign currencies;
• debt papers issued by other governments or by multilateral organizations such as the Asian Development Bank;
• corporate bonds;
• stocks of non-property firms listed on the local stock exchange or foreign exchanges; and
• cash and cash equivalents.
Furthermore, a REIT must appoint a fund manager, who must be independent of the REIT. The manager’s duties principally involve execution of the REIT’s investment strategy.
The rules state that “a REIT shall be subject to income tax ... on its taxable net income ... provided that in no case shall a REIT be subject to a minimum corporate income tax.” Earnings from the sale of any real property, or rental earnings from the property, will be subject to value-added tax (VAT). Transfer of securities will not be subject to VAT since a REIT is not considered a dealer. -- Neil Jerome C. Morales
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