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SM Prime drops REIT bid on stringent rules

Published : Friday, August 05, 2011 00:00 [ ]
Written by : Krista Angela M. Montealegre, Reporter

SM Prime Holdings Inc. has dropped its plan to conduct a real estate investment trust offering, the first casualty of the stringent rules that the Aquino administration has imposed to limit revenue lesions caused by laws that grant generous tax perks.

Jeffrey Lim, SM Prime chief finance officer, said the company was amenable to offer at least 40 percent of the REIT upon listing, but refused to give up control of the firm following the requirement to sell down 67 percent of the REIT within three years from listing.

The company had planned to raise $500-million from the offering. Its shares fell to P11.52 each on Thursday from P11.64 the day before.

“With the recent implementing rules of the REIT, we don’t think we will actually avail of the structure given the requirement of the minimum public ownership,” Lim said.

While the minimum public ownership requirement was the “most critical issue” for abandoning its REIT offering, SM Prime was also averse to the provision requiring REITs to set up escrow
accounts equivalent to the taxes they would be exempted from, Lim said.

Jose Sio, chief finance officer of parent firm SM Investments Corp., said one of the covenants that the SM Group forged with its creditors was for the conglomerate to have the controlling interest in any of its major subsidiary while the loans were outstanding.

As an alternative to the REIT, SM Prime will resort to bank borrowing to finance its projects. Lim said the company has fully covered its funding requirements for this year and the first half of 2012.

“We will continue with our programs given there are a lot of liquidity in terms of capital raising. We’ll just move on with our expansion projects without looking at the REIT capital markets,” Lim said.

The REIT Act lapsed into law in December 2009 but its implementation has been put on hold as fiscal authorities and corporate regulators took long in agreeing to the minimum public ownership of REITs, among other rules on tax incentives.

The Department of Finance estimates foregone revenues of at least P10 billion in the first year of implementing the law.

REITs are companies that own and operate income-generating real estate assets, which include offices, apartment buildings, hotels, warehouses, shopping centers and highways.

Under the revenue regulation endorsed by the Bureau of Internal Revenue to the DOF, REITs would have to distribute at least 90 percent of their earnings to shareholders before they can enjoy tax incentives.

The regulation also imposes value-added tax on a REIT’s gross sales from the disposal of real property or receipts from the rental of the same.

The Asia Pacific Real Estate Association is bucking the proposed BIR regulation, particularly the imposition of the 12-percent VAT and the requirement to give up control of the REIT in three years.

Members of APREA include three of the country’s biggest real estate firms, namely SM Prime, Ayala Land Inc., and Robinsons Land Corp., all of which had announced REIT offerings worth a combined $1 billion.

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