Do you wish to become part-owners of airports, shopping malls, hospitals, tollways, warehouses, hotels, residential and commercial buildings, and other income-generating properties? Of course yes. All of us want to be part in the real estate business because the income can come in two ways: rental income and the steady increase in the value of land.
But do we have the capital to invest in these properties? Most likely, no.
Here is where real estate investment trust or REIT is a good option. It offers a way for the investing public who don’t have that much money to fund large-scale constructions to be able to participate in the business.
What is REIT?
Anyone wishing to get into real estate balks at the high capital outlay needed just to get started, such as constructing a commercial building for example. After the building is up, recurring costs also pile up such as taxes, security, repairs, rent collection, making sure vacancy is kept low, dealing with tenants, etc.
Real estate investment trust or REIT allows the public to own shares of big properties with minimum capital and without having to worry about managing the day-to-day operations.
How does REIT work?
The Republic Act 9856, also known as the REIT Act of 2009, and the IRR (implementing rules and regulations) of the Securities and Exchange Commission on May 13, 2010 established REIT. The law and guidelines provide a way for businesses to place their real estate assets in a stock corporation, the REIT, where the public can invest. So Ayala, SM, Double Dragon, Robinson, and other large conglomerates can transfer their properties to this stock corporation, and then the public can buy shares from it.
The corporation owns income-generating real estate assets and has to abide by the following rules.
- Must be listed on the Philippine Stock Exchange.
- Minimum paid-up capital of ₱300 million
- Should maintain 33% public float, which is the portion of the company that is owned by the investing public.
- The company must have at least 1,000 public shareholders owning a minimum of 50 shares each.
- 70% investment in real estate assets or at least 35% of total assets invested in real estate.
- 90% of the net income is distributed as dividends.
- The company shall not invest in companies that are not publicly listed.
- Valuation of the company is conducted annually.
With the money pooled from the investors, the company can lease, manage, purchase or sell real estate properties. It also needs to hire an independent property manager and a fund manager.
The property manager performs task related to the general upkeep of the assets such as security, collecting rent, customer service for tenants, among other things. On the other hand, the fund manager is responsible in making sure that the company’s investment objectives are executed and met.
REITs are like mutual funds
In some ways, REITs are like mutual funds. The investing public buys shares of these companies, and they in turn use the pooled money to acquire assets that can increase the value of the shares.
In the case of REITs, those assets are offices, malls, warehouses, hospitals, airports, tollways, and other infrastructures. When you want to buy or redeem your investment, you need to trade the stocks from the exchange so you need to go through an eligible stock broker. Meanwhile, with mutual funds, you just have to go to a mutual fund company if you want to invest or sell.
See below the similarities and the differences between the two.
|Capital||Pooled funds from investors||Pooled funds from investors|
|Value||Stock price||Net asset value per stock|
|Valuation||Real-time||End of the trading day|
|Assets||Real estate||Stocks and fixed income securities|
|Buy||Purchase on the exchange||Buy stocks from the mutual fund company|
|Sell||Sell on the exchange||Sell stocks to the mutual fund company|
Advantages of REIT
But why would you want to invest in REIT? Here are the many benefits.
- Minimum capital. It relieves the pressure in coming up with huge capital or resorting to debts just to become part-owners of real estate. They are affordable.
- Less hassle. No need to hire contractors and construction firms, etc. You would also not be involved in managing the properties, so you are saved from overseeing repairs, looking for tenants, providing security, paying for insurance, etc.
- Dividends. Investors are entitled to 90% of the net income. There’s also the chance that this goes up through hikes in rent and tariff/tolls, low vacancy rate, etc.
- Value appreciation. The price of the stock may increase due to growing demand, increase in the value of the lot, development of vicinity around the location, etc.
- Assets are finished and already generating income.
- Management. Expert managers oversee the company and its assets.
- Diversification. The stocks contain mixture of projects.
- Liquid. REITs can be traded on the exchange on any trading day.
- Transparent. Companies are required to disclose the financial status of the company.
- OFW tax-exempt. Overseas Filipino workers can enjoy tax-free dividends for seven years starting in 2020.
Disadvantages of REIT
- Some companies may own only the buildings but not the land they stand on, which may deprive shareholders the chance to ride on the increase of the land property value.
- Real estate is cyclical. The market can experience hiccups such as high vacancy, and that can mean lower revenue.
- It is subject to tax hikes on properties imposed locally and nationally.
- Slower growth compared to other equities as most of the income goes out to shareholders as dividends.
- Investment risks can include deteriorating property values, higher interest rate, debts, location, unfavorable tax environment, etc.
- Some REITs have high management fees and levels of debts.
- They’re also susceptible to interest rate hikes. Investors buy treasury bonds and bills when interest goes up, driving share prices of REITs down.
Is REIT right for you?
When done right, investing in REIT can be one way for the public to beat the effects of inflation. It is also an affordable alternative in helping people grow their wealth in the long term.
It may be suitable for investors who are looking for passive income. Dividends are paid out annually, and if the price of the stock is undervalued then it can be attractive because you get higher yield. Yield is the amount of dividend over the stock price, so if the yield ₱10 and stock price is ₱100 the yield is 10%. The higher the dividend and the lower the stock price, the better the yield becomes.
It can also be good for long-term investing. Most of the income goes back to investors. The company may take time to grow (unless it borrows huge sums) because it has less money in acquiring new assets.
Also, it can be an option for those who are looking to diversify their portfolio as it provides a way of exposure to the real estate industry. It can give recurring income on a long-term basis.
What are the factors you need to consider before investing in REIT?
What are the things that you need to do before buying REIT shares? This year is going to be the first time that the country will see new REITs being offered in the market. So people are naturally going to wonder what the details that they need to look out for when considering them as investment option.
Here are two things: check and compare yield and do due diligence.
1. Check the yield and compare
This is perhaps the easiest to do.
The first thing you’re going to check is the yield, which is already described above, and then compare it to other alternatives in the market. See if it can beat returns elsewhere such as Pag-ibig MP2, preferred shares, blue chip stocks who are giving out dividends, and other Philippine publicly listed companies that issued dividends.
2. Do your due diligence
Perhaps the more important is to look into two things: the company and its assets. The company must have proven track record in the industry, and it has the trust and made a reputation among peers.
This can be done by looking at their credibility. What past projects did they have? Were they successful? Did they contribute to its success or failure? One other way is to see how resilient they are in times of crisis. Are debts weighing them down? How do they cope with the downturns in the market?
What have you heard about their expertise? Are they good property managers? Are their buildings well taken care of? How do they do their job in terms of making sure occupancy is at optimum?
Secondly, you have to see the actual properties that form part of the asset of the company. Here’s a rough guide to help you.
- What basket of properties does the company have? You can search for information because they are disclosed including details such as the name of hotels, condos, buildings, etc.
- Are they in prime locations?
- Are there future government projects in the surrounding area?
- What is the quality of the construction?
- How do these assets generate income?
- What is the general outlook of the businesses that lease, rent or occupy the properties?
- For commercial spaces, what is the vacancy rate and what kind of businesses are renting? Is there good foot traffic if the tenants are malls and retail? If it’s a hotel, how is the level of tourism activities?
How to invest in REIT?
There are two ways that you can invest in them: through stock trading and through UITF.
Through the stocks exchange
The first REIT to be introduced locally is Ayala REIT (AREIT), subsidiary of Ayala Land, which debuted in the exchange last August 13 for ₱27 a share. According to the available sources, expected dividend for this year is pegged at 4.85% in 2020 and expected to increase to 5.85% in the following year.
Because REIT is traded in the exchange, you can buy the stocks by following the steps below.
- Open a broker’s account. Not all stock brokerage companies are permitted to trade REITs. They have to undergo eligibility screening by the Philippine Stock Exchange. Check the broker of your choice if they’re given the green light to do this.
- Have an NOCD Account. You have to give authorization to the broker to open a Name on Central Despository (NOCD) account.
- Make sure that you buy the minimum shares according to the board lot.
- Subscribe to IPO. This is done via the PSE EASy.
Through unit investment trust funds (UITF)
In the market today, there are five UITF companies that are exposed to REITs abroad. Read this article on what is UITF for more information. The good thing about it is that you don’t need a broker. You just have to go to the company, fill out forms, pay at least the minimum starting capital and you’re subscribed.
As you can see in the table below, four of the funds are in foreign currency and only one in Philippine peso. You may want to read the article on unit investment trust fund
|BDO DEVELOPED MARKETS PROPERTY INDEX FEEDER FUND||USD||500.00||500.00||0.50% p.a.||0%||FTSE EPRA/NAREIT Developed Markets Index|
|Manulife Asia Pacific REIT Fund of Funds (USD Class A)||USD||1,000.00||100.00||1.75% as a % p.a. of the NAV||1.00% as a % of the amount withdrawn||Manulife Investment Asia REIT ex-Japan Index|
|Manulife Asia Pacific REIT Fund of Funds (PHP Unhedged Class A)||PHP||50,000.00||5,000.00||1.75% as a % p.a. of the NAV||1.00% as a % of the amount withdrawn||Manulife Investment Asia REIT ex-Japan Index|
|Manulife Asia Pacific REIT Fund of Funds (USD Class I)||USD||1,000.00||100.00||N/A||N/A||Manulife Investment Asia REIT ex-Japan Index|
|Manulife Asia Pacific REIT Fund of Funds (PHP Unhedged Class I)||PHP||50,000.00||5,000.00||N/A||N/A||Manulife Investment Asia REIT ex-Japan Index|