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REIT worries raised

Posted on July 28, 2011 11:24:57 PM [ BusinessWorld Online ]

STRINGENT TAX RULES will likely deter developers from setting up real estate investment trusts (REITs), industry officials said, with new escrow provisions adding to earlier concerns.

“The new rules... will make it even more difficult for large real estate companies to establish REITs. This will likely be a big amount, and it will affect the liquidity of companies,” BDO Capital and Investment Corp. President Eduardo V. Francisco told BusinessWorld on Wednesday.

Revenue Regulations 13-2011, issued by the Bureau of Internal Revenue (BIR) on Tuesday, detail the tax rules needed to implement REITs, stock corporations that pool investor funds to manage real estate assets.

The BIR granted a documentary stamp tax (DST) incentive to developers so that they would only have to pay 50% of the applicable DST when they transfer real property into the REITs.

Firms were also allowed to deduct dividends from gross revenues, bringing down their income tax obligations as they are required to distribute at least 90% of profits to shareholders.

At the same time, though, the rules required REITs to set up escrow accounts equivalent to the taxes they would be exempted from. These include the other 50% of their DST fees as well as the income tax due on dividends.

While the escrow amounts would vary, Mr. Francisco claimed this would be a “big burden.”

Colliers International Philippines’ director of valuation Marissa Y. Benitez said the firms’ money would be put to unproductive use.

“Instead of using this money elsewhere for operations, they will have to be parked in escrows, earning very little in interest,” she said in a phone interview yesterday.

According to the BIR rules, the funds will be released back to the firms only after they list in the Philippine Stock Exchange (PSE), where they are required to maintain a 40% minimum public float that needs to be increased to 67% within three years from listing.

Ms. Benitez warned that REIT firms could fail to reach the float requirement by no fault of their own.

“The Philippines has a small population investing in the stock market. What if the firms offer the shares to the public but only a few avail of them?” she said.

“Currently, a lot of listed companies cannot even reach the 10% public ownership rule imposed by the PSE,” Ms. Benitez added.

The local bourse has set a November deadline for all listed firms to comply with the 10% float requirement. Some firms have said they were willing to delist or bear with penalties instead.

AB Capital Securities, Inc. analyst Arlysa E. Narciso shared the sentiment, saying, “The 10% float is already a challenge for some companies. The 40% to 67% requirement places a high demand on REITs.”

Moreover, real estate companies expect interest rates to increase later this year due to inflation, which could bring up their borrowing costs and affect revenues, she explained. This could dampen demand for their shares.

The liquidity restrictions due to the escrow requirement could also bring down REITs’ valuations, affecting their marketability, Colliers’ Ms. Benitez added.

Under these scenarios, the real estate companies would lose their escrow funds despite their attempt to open the REITs to the investing public, she pointed out.

The restriction represents another hurdle for developers who were already dissatisfied with the government’s other REIT rules. During the protracted negotiations, businesses had lobbied for a 33% public float.

The PSE itself released a position paper saying that the Philippines’ 40-67% requirement would be the highest in the region.

The value-added tax (VAT) on the transfer of property into the REIT vehicle was also hotly contested as the investors hoped for an exemption.

“Just with the rules on VAT and the minimum public ownership, it was already unlikely that the large real estate companies would set up REITs. Now, the escrow will be another hurdle,” said BDO Capital’s Mr. Francisco, who also represents the private sector in the Capital Market Development Council.

Property giants that have expressed interest in REITs, such as SM Prime Holdings, Inc. and Ayala Land, Inc., remained unavailable for comment.

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