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PSE to push hard for REIT practice

By Danessa O. Rivera
05/28/2012 [ tribune.net.ph ]

The Philippine Stock Exchange (PSE) said it will be aggressive in pushing for the implementation of Real Estate Investment Trust (REIT) in the country.

“We’ll just keep pushing. We’ll give the government more data, we’re going to be aggressive,” PSE president and CEO Hans Sicat said.

Last Friday, the PSE announced it is reviving talks with industry and investment stakeholders to address the current issues on the REIT, with the goal of finding a workable framework acceptable to all parties.

Sicat said the new product must be out in the market as soon as possible.

“The sooner the better if we can work through some regulatory amendments and get it up and running, but I think the true test is getting the product out there and see sponsors and developers actually sign up to it. There’s a huge amount of demand for this product. We are aware of the competitive landscape...Get this structures running then fine tuning later on,” he said.

“There is still overwhelming interest in investing in REITs in the Philippines. When we get the REITs listing going, we estimate that the Philippines can generate at least $2.4 billion in new investments from the private sector, because of the additional capital that the REIT structure can provide.  It is quite unfortunate however that all the potential issuers have decided to defer their REIT plans indefinitely,” he added.

The REIT law was passed in 2009, and subsequently, implementing rules were issued by both the SEC and BIR last year. However, the interest in participating in the REIT from any of the industry players was dampened by the stringent rules related to the minimum public ownership, as well as the imposition of value added tax or VAT and the requirement of escrow.

Under the revised SEC rules, the minimum public ownership (MPO) required for a REIT to be entitled to the tax incentives  is at least 40 percent in the first year, which should be increased to 67 percent by the end of the third year.

The BIR further imposed a requirement that REIT companies have to set aside in escrow an amount equivalent to the tax incentives and this amount will be forfeited in favor of the government should the REIT company fail to increase the MPO to 67 percent after the third year.  The other issue pertains to the imposition of VAT on initial asset transfers to the REIT.  In order to set up a REIT, the potential issuer must form a REIT corporation to which the issuer will have to transfer its REIT-able assets.

In previous years, such transfers were tax free and were not subject to any form of tax. 

For the minimum public ownership (MPO), Sicat said the sweet spot is at the 33 to 40 percent level. “Original proposal was 40 percent initially and the increase each year to 67 percent. We said that just doesn’t work because the overall overhang. Because each year there will be more dilution as more investors will come. The product itself will never price itself correctly. It’s kind of doomed to fail,” he said.

They are recommending a graduated MPO depending on the market capitalization wherein the public can own 67 percent for a REIT with market cap of P300 million to P1 billion, 62 percent for above P1 billion to P2 billion, 57 percent for above P2 billion to P5 billion, 52 percent for above P5 billion to P10 billion, 47 percent for above P10 billion to P15 billion, 40 percent for above P15 billion to P20 billion and 33 percent for those above P20 billion.
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