First Philippine Reits likely to be listed by year-end as government relaxes rules in decade-old law

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The Philippines could see real estate investment trusts take off this year after the government amends a Reit law passed more than a decade ago, addressing investor concerns, say industry observers.

"Reits are likely to be implemented this year as the government has agreed to relax the law's restrictive rules," said Joey Bondoc, senior research manager for Philippines at Colliers. "Colliers believes that more firms are likely to tap Reits once the law's implementing rules and regulations are relaxed."

Reuters reported in April that Ayala Land, one of the Philippines' largest developers, could raise US$500 million in what would be the country's first Reit offering.

Bondoc said that taking into account Ayala Land's proposal, existing cap rates in the market and the amount of assets that developers could divest through Reit using the minimum public ownership of 33 per cent, the market could be worth around US$8 billion to US$9 billion.

Although the Reit law was passed in 2009, the launch of Reits was held up because of the reluctance of the previous administration to grant tax perks under the scheme to developers that could have potentially resulted in an estimated loss of 3.7 billion pesos (US$71.6 million) in revenue a year.

Marco Antonio, chief executive at listed Century Properties Group, said the expected launch of Reits this year could not have come at a better time, citing the bullish property sector, growing economy and the government's aggressive infrastructure projects.

"Reits will provide developers like us new capital to expand and deliver high value real estate projects," he said. Century Properties has a commercial portfolio of 300,000 square metres of gross floor area.


Century Properties Group's Century Diamond Tower will add 58,000 square metres of leasable area to its portfolio when the project is completed by the end of the year. Photo: Handout

Last year it completed the Asian Century Center, a 21-storey green office building in Bonifacio Global City, near Makati, Manila's main business district, which was 75 per cent leased out even before opening.

Antonio said that the completion of the Century Diamond Tower in Makati later this year will add 58,000 square metres to its portfolio and lift its leasing revenues to 2 billion pesos by 2020.

Analysts said that while many Philippine developers were well-positioned to enlist various traditional asset classes, such as retail, hotel and industrial properties, and non-traditional classes like infrastructure, medical and education into a Reit, they would start with office buildings because they are attractive.

Office lease rates in the Philippines grew 7 per cent per year over the past five years, faster than the average rise of retail rents of 5.6 per cent in the same period.

Colliers sees office rents increasing 5 per cent a year over the next two years.

Bondoc said Reits relating to retail property were likely to follow within the next three years as developers tap Reits to renovate existing shopping centres, attract more interesting tenants and retain consumer traffic in the face of the growing e-commerce onslaught.

Between 2016 and 2018, shopping centre lease rates slowed to 2.5 per cent from 4 per cent in the preceding two-year period. Malls in Metro Manila also saw vacancy rates rise to 10 per cent in the first quarter of the year, from 9 per cent in the third quarter of 2018.

However, as new supply tapers in 2021 and 2022, rents should recover.

"This is complemented by three factors: the fact that F&B [food and beverage] accounts for 30 per cent to 50 per cent of retail space in the Philippines; Filipinos' fondness for F&B, which continues to a grow at a sustained pace despite inflation peaking in 2018; and higher disposable incomes following the reduction in personal income tax rates that started in 2018," Bondoc said.

Rick Santos, chairman and CEO of property consultancy Santos Knight Frank, noted that Reit stocks outperformed non-Reit property stocks in Asia-Pacific.

Over the last five years, the value of Singapore Reits rose 9.5 per cent versus 1 per cent for non-Reits, while Hong Kong Reits were up by 23 per cent, versus 6.1 per cent for non-Reits, according to Thomson Financial Datastream in May 2019.


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